Sappi Ltd. Annual Report 2010

Plain-text annual report

www.sappi.com Inspired by life “Look deep into nature, and then you will understand everything better” – Albert Einstein This inspiration and the insights we gain informs our technical excellence, our innovations, our relationships and the use of our resources. It is the spark that ignites the passion in our people and makes the end solutions relevant and successful. annual report 2010 a n n u a l r e p o r t 2 0 1 0 Our reporting strategy Forward-looking statements The King Report on Governance for South Africa 2009 (King III), information that is material, relevant, accessible, understandable which is recognised internationally as a leading governance and comparable” and to demonstrate that “…strategy, risk, standard, was adopted by the JSE and became effective on performance and sustainability are inseparable” in the way Sappi 01 March 2010. As we are headquartered in South Africa with our manages its business. primary listing on the JSE Limited we subscribe to King III. In line with the integrated reporting requirement contained in King III, we have increased the level of integration in this year’s report. Primarily we are responding to the guideline to “…transparently disclose We use various structured reporting mechanisms to assist stakeholders to make informed decisions about their interactions with the group. For a complete view of Sappi’s strategy, performance in the year ended September 2010 and longer term prospects, stakeholders are directed to the following sources of company information:  Quarterly results announcements and analyst presentations.  Annual reports and accounts, prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).  Form 20-F, prepared in accordance with US Securities and Exchange Commission (SEC) regulations.  Sustainable development report, aimed at giving the reader a broad overview of our sustainability performance.  Our online report (http://sappi.investoreports.com/sappi_sdr_2010) follows the same structure as the printed report, but incorporates additional detail and includes a comprehensive Global Reporting Initiative (GRI) index which has links to relevant sections in the annual report, the Form 20-F and previous sustainability reports.  Group website – www.sappi.com Certain statements in this report that are neither reported ﬁ nancial results nor other historical information, are forward-looking statements, including but not limited to statements that are predictions of or indicate future earnings, savings, synergies, events, trends, plans or objectives. The words ‘believe’, ‘anticipate’, ‘expect’, ‘intend’, ‘estimate’, ‘plan’, ‘assume’, ‘positioned’, ‘will’, ‘may’, ‘should’, ‘risk’ and other similar expressions, which are predictions of or indicate future events and future trends, which do not relate to historical matters, identify forward- looking statements. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results and company plans and objectives to differ materially from those expressed or implied in the forward-looking statements (or from past results). Such risks, uncertainties and factors include, but are not limited to:  the highly cyclical nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand, production capacity, production, input costs including raw material, energy and employee costs, and pricing);  the impact on our business of the global economic downturn;  unanticipated production disruptions (including as a result of planned or unexpected power outages);  changes in environmental, tax and other laws and regulations;  adverse changes in the markets for the group’s products;  consequences of substantial leverage, including as a result of adverse changes in credit markets that affect our ability to raise capital when needed;  adverse changes in the political situation and economy in the countries in which we operate or the effect of governmental efforts to address present or future economic or social problems;  the impact of investments, acquisitions and dispositions (including related ﬁ nancing), any delays, unexpected costs or other problems experienced in connection with dispositions or with integrating acquisitions and achieving expected savings and synergies; and Note: Please refer to the glossary of terms used in this report on pages 189 to 191.  currency ﬂ uctuations. Sappi Limited is listed on the following stock exchanges and is subject to their listing requirements:  JSE Limited, South Africa (primary listing)  New York Stock Exchange, USA (secondary listing) We undertake no obligation to publicly update or revise any of these forward-looking statements, whether to reﬂ ect new information or future events or circumstances or otherwise. This report is printed on Magno Satin: cover – 250g/m2, pages 1 to 64 – 150g/m2 and Triple Green Silk: pages 65 to 200 – 115g/m2 Sappi is a leading producer of coated fi ne paper used in the printing of high end printed communications. Cover picture: Wood chips are a renewablle resource from certiﬁ ed forests used at Sappi Saiccor Mill www.sappi.com This report has been compiled and produced by Sappi Corporate Affairs® 2010 Sappi House • 48 Ameshoff Street • 2001 Braamfontein • Johannesburg • South Africa 2010 annual report 1 Contents of our report Who we are A quick overview of our business showing the geographic spread of our operations and markets. Performance highlights An overview of our performance during the year, including ﬁ nancial and other highlights. Letter to the shareholders from the chairman and chief executive ofﬁ cer The chairman and chief executive ofﬁ cer review the group’s performance and strategic developments against key objectives for the year, as well as our objectives for 2011. Interview on strategic matters with Ralph Boëttger, chief executive ofﬁ cer Investors’ most frequently asked questions are answered. Serious about sustainability A process diagram with explanations that provide a picture of our operations, showing inputs, and outputs as well as our impact on the environment and communities in which we operate. Our markets Describes the wide range of end-uses and showcases some leading brands in each of our main product segments. Our leadership Provides short CVs for the non-executive and executive members of our board, and lists senior management in Sappi Limited and our operating divisions. Review of operations Provides commentary on performance as well as our expectations. Sappi Fine Paper Sappi Southern Africa Chief ﬁ nancial ofﬁ cer’s report The chief ﬁ nancial ofﬁ cer discusses our group and regional operating results and provides an analysis of group cash ﬂ ow statements, balance sheets, net debt, credit ratings, and share listing and share price performance. Five-year review Our key performance measures of the income statement, balance sheet and cash ﬂ ow statement, as well as proﬁ tability, efﬁ ciency and liquidity ratios, and exchange rates, over a ﬁ ve-year period. Share statistics Provides relevant statistics, including number of shareholders, number of shares in issue, number and value of shares traded, price per share, earnings and dividend yields, PE ratio and total market capitalisation. Governance and compensation Risk management Corporate governance Compensation report Annual ﬁ nancial statements Glossary Notice to shareholders, Shareholder’s diary, Administration and Proxy form for annual general meeting 02 04 06 09 10 14 18 22 22 26 30 56 58 60 61 63 69 78 189 192 2 Who we are Globally Sappi works closely with customers, both direct and indirect, in over 100 countries to provide them with relevant and sustainable paper, paper-pulp and chemical cellulose products and related services and innovations. Our market-leading range of paper- products includes: coated ﬁ ne papers used by printers, publishers and corporate end-users in the production of books, brochures, magazines, catalogues, direct mail and many other print applications; casting release papers used by suppliers to the fashion, textiles, automobile and household industries; and in the Southern African region newsprint, uncoated graphic and business papers, premium quality packaging papers, paper grade pulp and chemical cellulose. Our chemical cellulose products are used worldwide by converters to create viscose ﬁ bre, acetate tow, pharmaceutical products as well as a wide range of consumer products. The pulp needed for our products is either produced within Sappi or bought from accredited suppliers. Across the group, Sappi is close to ‘pulp neutral’, meaning that we sell almost as much pulp as we buy. Key facts 15,600 employees worldwide Sales in over 100 countries Manufacturing operations on four continents Paper production capacity of 6.6 million tons per annum Paper pulp production capacity of 3.3 million tons per annum Chemical cellulose production capacity of 800,000 tons per annum 2010 annual report 3 Sappi Fine Paper North America 21% of group sales Sappi Fine Paper Europe 55% of group sales 3 Mills 4 Sales offices 9 Mills 16 Sales offices Maine New York Boston Minnesota Ohio California Finland Russia United Kingdom The Netherlands Poland Belgium Germany France Switzerland Austria Hungary Ukraine Georgia Spain Italy Greece Turkey Sappi Southern Africa 24% of group sales Sappi Paper and Paper Packaging 6 Mills + 1 operation 4 Sales offices Sappi Forests 555,000 ha 1 Sawmill Sappi Chemical Cellulose 1 Mill Sappi Trading Sappi Trading operates a network for the selling and distribution of our products outside our core operating regions of North America, Europe and Southern Africa. Sappi Trading also co-ordinates our shipping and logistical functions for exports from these regions. Sales offices Logistics offices Durban New York Bogotá Hong Kong Johannesburg Mexico City Nairobi São Paulo Singapore Shanghai Sydney Taipei Vienna Jiangxi Chenming Paper Co (JV) 34% ownership China 1 Mill Corporate head office Regional head offices Mills Sales offices Johannesburg Durban Port Elizabeth Cape Town 4 Performance highlights 2010 was a much improved year for Sappi. Demand for our paper and pulp improved gradually through the year off the very low levels seen in 2009. Pulp prices rose rapidly during the year, beneﬁ ting our Southern African and North American businesses, which are net sellers of pulp, but squeezing margins in our European business, which buys approximately half of its pulp requirements. The European business was able to improve margins in the ﬁ nal quarter following three sales price increases for coated woodfree paper during the year, but its margins remained well below acceptable levels. Each of our businesses generated positive operating proﬁ t for the year and in the ﬁ nal quarter the group achieved its highest quarterly operating proﬁ t (excluding special items) for a number of years. Sales up 22% to US$6.6 billion Operating proﬁ t of US$339 million (2009: US$33 million) excluding special items Net proﬁ t US$66 million (2009: US$177 million loss) EPS 13 US Cents (2009: Loss per share 37 US Cents) Continuing strong net cash generation of US$341 million (2009: US$289 million, excluding the Acquisition) Net debt down to US$2.2 billion (2009: US$2.6 billion) Strong liquidity Black economic empowerment deal completed * Restated for the rights issue in ﬁ scal 2009. Note: Deﬁ nitions for various terms and ratios used above are included in the glossary on pages 189 to 191. 2010 annual report 5 Specifi c CO2 emissions from purchased fuels (t/adt) Speciﬁ c (ie per air dry ton of pulp produced) CO2 emissions show a declining trend, reﬂ ecting an increase in the use of own renewable fuel, particularly in North America. Increases in water consumption for 2009 were the result of decreased production – when production stops or slows, depending on the duration, water is still consumed to keep the machines running. Globally, the total speciﬁ c (ie per air dry ton of product produced) water use has dropped by approximately 8.2% over the three years. Safety performance improved for both employees and contractors. The contractor LTIFR in South Africa is the lowest ever recorded. Black Economic Empowerment (BEE) Scorecard Our Southern African business has improved its performance against the Forestry Sector Charter Code, measured by Empowerdex in October 2010, to AA. Code of ethics Sappi requires it directors and employees to act with the utmost good faith and integrity in all transactions and with all stakeholders with whom we interact. This commitment is reﬂ ected in the group’s Code of Ethics. The code is based on Sappi’s core values of Excellence, Integrity and Respect. During the year we conducted a survey, “Code of Ethics: are we walking the walk?”, which identiﬁ ed that over 85% of all employees were familiar with our Code. Value added One measure of wealth created is the amount of value added to the cost of materials and services purchased. Below we have depicted the value added by the Sappi group and how it was distributed among stakeholders. 6 Letter to the shareholders from the chairman and chief executive ofﬁ cer Our objectives for 2011  Continue improvement of profi tability and returns  Improve ROCE by >25%  Reduce net debt and fi nance costs  Reduce net debt to total capitalisation to <50%  Improve European operating margins and profi tability  Implement new service model in Europe  Maintain operating profi t and operating margins in North America  Improve profi tability of the Paper and Paper Packaging business in Southern Africa Danie Cronjé chairman Ralph Boëttger chief executive ofﬁ cer 2010 was a much improved year for Sappi. We achieved a gradual improvement in the performance of each of our businesses from the low base of the previous year during which the global economic decline led to reductions in demand of up to 30% for coated paper. The group returned to profitability for the year, generating a net proﬁ t of US$66 million. By our fourth quarter, most of our businesses were operating at close to full capacity and prices were improving, resulting in a net proﬁ t of US$84 million for the quarter. Each of our regional businesses achieved a much improved and positive operating proﬁ t for the year and generated signiﬁ cant cash. Performance against objectives Our primary objective was to restore the group to proﬁ tability and to improve returns. Although we are not yet satisﬁ ed with the returns, we have made signiﬁ cant progress, achieving a 8% return on capital employed for the year compared to 1% for 2009. In the ﬁ nal quarter, we achieved a 13% return on capital employed, which was ahead of our minimum target of 12%, reﬂ ecting the improvement through the year aided by an element of seasonality. The group’s operating profit excluding special items was US$339 million compared to US$33 million in 2009. Cash generation after ﬁ nance costs, taxation and capital expenditure was US$341 million for the year, above the US$289 million (excluding the Acquisition) achieved in 2009. Our net debt reduced to approximately US$2.2 billion as a result of the strong cash generation. Net debt levels have reduced by approximately US$600 million from their peak in mid-2009 and we believe we are well placed to achieve a level of below US$2 billion, well ahead of the target date of September 2012. 2010 annual report 7 Regional performance The outstanding performer of the year was our North American business. Following its restructuring in 2009, the business achieved high operating rates, further improved its collaboration with customers and increased productivity across our operations. Coated paper prices in North America were depressed for most of the year; however, the business beneﬁ ted from its competitive cost base as well as its surplus pulp position and rapidly increasing pulp prices through the year. The casting release paper speciality business performed well as a result of strong demand particularly from Asia. Our European business achieved a rapid turnaround in the coated ﬁ ne paper business with operating rates exceeding 90% for the year. Three coated ﬁ ne paper price increases were achieved in the second half of the year, with the latest implemented in September. The coated mechanical paper market recovery lagged signiﬁ cantly but, by the ﬁ nal quarter, demand was strong and a small price increase was achieved. The European business purchases approximately 50% of its pulp requirements, which resulted in a signiﬁ cant margin squeeze through the year as pulp prices increased rapidly. Towards the end of the year, the combination of ﬂ at or even softer pulp prices and higher paper prices resulted in slightly improved margins. The Southern African business achieved good results in the chemical cellulose sector following the expansion of the Saiccor Mill, strong demand, good price levels and improving levels of output. The paper and paper packaging paper business’ performance was disappointing as a result of weak demand during the ﬁ rst half of the year and less than optimal operating efﬁ ciencies; however, the performance improved in the second half. The relative strength of the Rand to the US Dollar had a signiﬁ cant, unfavourable effect not only on exports, but also on the domestic business as a result of the increased competition from imports. The operating reports and the chief ﬁ nancial ofﬁ cer’s report provide additional detail on the year’s performance. Strategic review Our aim is to be, on a sustainable basis, the most proﬁ table company in paper, pulp and chemical cellulose-based solutions and we measure this in terms of return on capital employed. Although we made signiﬁ cant progress during the year, our performance is still well short of our goal. Our focus is on improving the performance of our existing businesses and our balance sheet. Our capital investment has therefore been targeted at areas required to keep the core business healthy including cost reduction projects, particularly energy-related. In the year ahead, we will continue to focus on improving the underlying business to create a platform for our future growth in the areas of low cost plantation ﬁ bre, chemical cellulose, and forward integration in select areas of the value chain. Our primary objective was to restore the group to proﬁ tability and to improve returns. We have made signiﬁ cant progress. in rehabilitating plantations lost to ﬁ re in 2007 and 2008, including at Usutu in Swaziland. At the start of 2009, we acquired the M-real coated paper business to improve our market position and the supply/demand balance. The business has been successfully integrated with our European business and the target synergies have been achieved. With demand levels now closer to the levels achieved in 2008, before the unprecedented collapse in early 2009, we believe the business is well positioned to take full advantage of the acquisition. We continue to explore further strategic changes in order to ensure we rapidly achieve targeted return levels of at least 12% return on capital employed. How we do business is as important to us as what business we do. In Europe, our Project Breakthrough is based on detailed input from our customers throughout the value chain, academics, and our turnaround experience in North America. We have recently started the implementation of new service offerings, which are supported by our tailor-made support infrastructure and leading products. Throughout the group, we aim to be easier to do business with. Excellence, Integrity and Respect are the core values we apply to how we conduct our business. Sustainability performance We manage sustainability as an integral part of our business and decision-making, and strive to create value for current and future stakeholders. The safety of our people is prioritised throughout the group in order to ensure that everyone contributing to our success returns home safely to their families. Regrettably, four people died in work-related accidents during the year. Two of the accidents were in our plantation operations, one at Saiccor Mill in South Africa, and one at Kirkniemi Mill in Finland. We continue to emphasise the importance of leadership, the application of behaviour-based safety systems and of specific protocols to prevent fatalities throughout our operations. In our approach to sustainability, we recognise that as a major industrial producer we have an impact on our people, on the communities in which we operate and on the environment. We strive to continuously improve our footprint with particular emphasis on carbon emissions, the quality of water and the quality of air. We are advantaged by the nature of our major raw material, which is renewable wood ﬁ bre from sustainably managed forests and During the year, we acquired 14,500 hectares of developed softwood plantations. We aim to maximise this advantage while simultaneously plantations close to Ngodwana Mill and have made good progress reducing our other impacts. 8 Letter to the shareholders from the chairman and chief executive ofﬁ cer continued Black economic empowerment We completed a share-based Broad-based Black Economic Empowerment (BBBEE) transaction in June following shareholder approval in April. In the ﬁ rst part of the transaction, Lereko Investments, our strategic empowerment partner, exchanged its interest in Sappi’s plantation land for Sappi Limited shares. The second and major part of the transaction, which is fully described on our website, is primarily for the beneﬁ t of our employees in South Africa. Our southern African business has improved its overall empowerment scorecard performance measured by an independent rating agency, from BB last year to AA in October 2010. We continue to grapple with the challenge of improving the diversity of our middle to senior management, which is essential to the success of the business in South Africa. Looking forward We expect continued gradual improvement in global economic conditions during the year ahead; however, we remain cautious as a result of factors such as expected ongoing volatility of exchange rates which could result in varying levels of growth in the various regions in which we operate or sell our products. We expect demand for coated paper to continue its recovery next year and for operating margins in our North American and European coated paper businesses to reﬂ ect the improvement in demand. Our businesses are likely to be faced with continued high input costs and the margin improvement will require continued cost management and revenue growth through volume, mix and the achievement of higher price levels. Our chemical cellulose business is well placed as a result of the strong growth in demand for viscose ﬁ bres based on strong demand for textile ﬁ bres, and more particularly, as a result of the need for a sustainable supply of absorbent cellulosic ﬁ bres in ﬁ bre blends. The primary cellulosics which fulﬁ ll this role are viscose and cotton. Cotton is currently in short supply and it is likely to remain so as a result of the need for land for food security. Our capital expenditure will be focused on areas required to maintain the business; however, we foresee a modest increase in the year ahead compared to the 2010 level of expenditure, which was approximately US$200 million, in order to take advantage of high return projects, particularly relating to energy costs. We expect further improvements in operating proﬁ t excluding special items in 2011. The improvement of our European business remains a key focus and we aim to build on the achievements over the past year to return it to acceptable returns. With both economic conditions and our performance improving, we will not need to hold as much cash as we did last year and will therefore continue to repay debt, thereby reducing our ﬁ nance costs. We expect that our cash generation during the year will reduce our net debt and further reduce our ﬁ nance costs. Our customers place enormous trust in us and our ability to meet their changing and growing requirements, and we undertake to continue to work closely with them to ensure we meet their and our needs for value. and new paper capacity in China, which could impact the supply demand balance in our markets. (A fuller discussion of risks is available on pages 61 to 62.) We have a positive view of the year ahead and are looking forward to an improvement in returns for the year. Appreciation Many participants have contributed to our improving performance over the past year and we value their support. Our customers place enormous trust in us and our ability to meet their changing and growing requirements, and we undertake to continue to work closely with them to ensure we meet their and our needs for value. Our people continue to display a persistence and determination to produce sustainable proﬁ ts. The initiative and resourcefulness of our people has made it possible to raise our sights and launch into 2011 with ever improving prospects. We thank you. Our board has continued to provide insight and encouragement as we tackled the challenges of the past two years, and we thank them for their professionalism and openness. Helmut Mamsch will be retiring from the board at the end of December 2010 after seven years of service. He has contributed considerable expertise and wisdom to the deliberations of our board and audit and compensation committees and as chairman of the Sappi Fine Paper Europe audit committee, and we thank him for his guidance. We welcomed Peter Mageza, Valli Moosa and Rudolf Thummer to the board during the year. They each bring wide and varied experience to the board. In addition, Mr Moosa’s appointment will further strengthen the group’s relationship with our strategic empowerment partner, Lereko Investments. We thank our shareholders for their support and look forward to their participation at the annual general meeting on 09 February 2011. Factors that could upset our expected improvement include, lower than predicted global economic growth which could lead to lower demand and prices for our products, increased currency volatility Danie Cronjé Chairman 03 December 2010 Ralph Boëttger Chief executive ofﬁ cer Interview on strategic matters with Ralph Boëttger, chief executive ofﬁ cer 2010 annual report 9 Last year you said that you expected demand in your coated markets to improve to around 10% short of 2007/2008 levels. How is the recovery progressing? Our view has been well supported by the recovery in demand in Europe and North America. In Europe, demand for coated woodfree paper in the ﬁ rst nine calendar months of 2010 grew 4% compared to 2009 and in North America, 20%. In our ﬁ nancial year, our European business operated at 93% for coated woodfree paper and North America was effectively fully sold for the whole year. Demand for coated mechanical paper in Europe recovered more slowly but by September 2010, shipments were at a high level. Inventory levels for coated paper remain at relatively low levels compared to prior years. There is strong evidence that marketing campaigns will integrate print not eliminate it from the media mix. Print is recognised as a leading and trusted part of the mix. What is the excitement about chemical cellulose? Importantly, it is a renewable resource with a multitude of uses, from textile ﬁ bres, cigarette ﬁ lters, plastics, pharmaceutical binders, While we expect recovery to continue in 2011, we continue to food thickeners and almost certainly more to come. expect a gradual decline in coated paper demand in the developed markets from the highs achieved in 2007/2008 as a result of new choices of media. Do you have greater clarity on what impact ‘new media’ will have on coated paper consumption? We have more and more evidence that coated paper will continue to play an important role in communication, advertising and promotion. Many of the 2010 festive season communication programmes were launched in September magazines and catalogues. Magazines such as Elle and Vogue achieved record and near-record size issues. There is strong evidence that marketing campaigns will integrate print not eliminate it from the media mix. Print is recognised as a leading and trusted part of the mix. Where will Sappi’s future growth come from? Firstly, our European and Southern African businesses are not yet achieving their full potential returns. In particular, we aim to achieve returns of at least our cost of capital in Europe, our largest business, which will allow the whole group to achieve more than its cost of capital. As far as asset growth is concerned, that will come from increased investment in chemical cellulose and pulp, low cost plantation ﬁ bre, some of our speciality businesses and growth along the supply chain. Viscose ﬁ bre producers are our largest customers. Viscose fibres either alone, or in blends with oil-based fibres are important in the overall textile mix because they are absorbent and therefore comfortable to wear. They are an excellent substitute for cotton, which has long-term supply limitations. The growth in viscose and similar cellulosic ﬁ bres is expected to be signiﬁ cantly faster than the overall growth in textiles ﬁ bres. Your debt is declining in line with your target but your fi nance costs remain a burden. What can you do about it? Our net debt came down by US$355 million to close to US$2.2 billion over the year and we repaid certain long-term debt early. Out of prudence, we have continued to hold a higher than historic cash balance, but with the improved performance of our business and the greater stability of ﬁ nancial markets, we aim to gradually reduce cash on hand by repaying debt. This will contribute to reducing our ﬁ nance costs. We also aim to reduce our gearing further to reduce the proportion of our proﬁ t paid out to lenders. Do you have any other comments? Thank you. I think it is important to record that our people’s hard work and persistence is paying off; we are seeing the beneﬁ ts of the actions we have taken over the past couple of years and it is pleasing to note that we are going into the new year with a run rate As our business grows, we foresee a decline in the relative performance at close to our target of achieving returns of at least proportion of ﬁ ne paper, which currently represents 76% of our our cost of capital. We are looking forward to improved returns and sales and about 68% of EBITDA. to growth. 10 Serious about sustainability Sappi’s commitment to sustainability is intrinsic to the way we manage our business. We recognise that sustainable proﬁ tability can only be achieved if we create value for current and future stakeholders. As we have an impact on our people, on the communities in which we operate and on the environment, it is necessary for us to act in terms of our core values of Excellence, Integrity and Respect in all interactions. We have a Sustainability Charter in place, which sets out our commitments in relation to Prosperity, People and Planet, and we integrate sustainability objectives into our daily business. As a responsible corporate citizen, we have a well- established governance structure for sustainability, which we continue to strengthen. In addition, we use international, independently veriﬁ ed management systems throughout our business to ensure best practices in safety, quality, environmental protection, forestry, lean manufacturing and continuous improvement, as indicated in the pages that follow. G ULPIN P Digester Chipper INPUTS Energy Chemicals Water Fibre Wood fibre, logs, thinnings and sawmill by-products for integrated mills which do their own pulping. Bagasse (sugar cane waste residue) – Stanger Mill (Triple Green range and Masuga). Recovered fibre We are driving the use of W recovered ﬁ bre throughout our operations. The majority of our products are recyclable. Integrated mills r t e + W a a l s e m i c y + C h e r g n E Lime mud Lime mud, a by-product of the pulping process, is used by farmers to control soil pH. Bleaching plant Recovery boiler Ash The ash created by burning bark, branches and other biomass from trees in some form of our mill boilers, can be used as fertiliser and a soil additive solid waste Lignosulphanate A joint venture in South Africa and a wholly- owned subsidiary in Europe produces lignosulphanate which is based on the binding agent of wood and is a co-product of pulp production. Lignin-based products are used as dispersing agents in concrete, textile dyes, pesticides, ceramics and as binding agents in briquetting, animal feed and dust suppression. Tall oil At some mills, tall oil from organic soaps is sold to a convertor and used to make lubricants, detergents and paint additives. solid waste Energy + Chemicals + Water CO2 Our mills emit carbon dioxide (CO2), one of the main greenhouse gases (GHGs) responsible for global warming. Globally our CO2 emissions from fossil fuels have declined by 25% over the last five years. Energy Chemicals Water In integrated mills, the black liquor created during the pulping process is a primary source of renewable energy. Black liquor is burnt in the recovery boiler, producing steam and power which is used in the mill. Chemicals are re-used wherever possible, otherwise they enter the waste stream or are beneficiated. 90% of water drawn is returned to the environment and is treated before it exits the process. Globally, total suspended solids (TSS) and chemical oxygen demand (COD) – indicators of water quality in effluent – show a declining trend. OUTPUTS (Recycling) Energy, chemicals and water are recycled throughout the process Integrated and non-integrated mills Screens Papermaking 2010 annual report 11 Pulp Waste ﬁ bre recycling Energy + Che micals + W ater PA P E R De-inking sludge De-inking sludge, containing ink and varnishes, is used as a fuel substitute. M A KIN G A N D F I N I S H I N G Waste sludge Waste sludge can be combusted for heat gain or used in applications such as the manufacture of bricks, cement or household products such as cat litter. Dried residual sludge can also be used as animal bedding material. Coating and calendaring Coarse pigments At some mills, coating colour is also recovered from effluent and reprocessed. G PIN P A R D W N G A T I N C U T s o l i d w a s t e Solid waste – all mills This shows our five top categories of waste. Boiler ashes are the most significant waste category, resulting from the use of coal. Methane Methane, a GHG with a global warming potential approximately 23 times more potent than CO2, is emitted from landfills. Globally, the amount of solid waste we send to landfill shows a steady decline, in line with our move away from coal-fired boilers to gas- and biomass fired boilers (Gratkorn and Tugela Mills). Since 2006, specific solid waste sent to landfill has dropped by 4.6%. Delivery Our markets See our markets on pages 14 to 17 To mitigate our carbon footprint, we are increasingly moving our product by rail rather than road. collection (for recycling) de-inking cleaning and screening recycled fibre 12 Serious about sustainability continued Sustainable ﬁ bre Over 15 years, we have increased our fibre yield per hectare of eucalyptus plantation in South Africa by 60%. In collaboration with the University of Pretoria, Sappi’s tree breeders at the Tweedie Research Centre developed a reliable DNA fingerprinting tool to improve breeding efﬁ ciency in 2010. Fibre base Fibre is an important resource and we continue to invest in developing our low cost ﬁ bre base in South Africa by acquiring new land holdings, rehabilitating areas lost to fire and improving fibre yield and characteristics through world-leading tree breeding programmes. In Europe and North America, ﬁ bre is sourced from small and large forest owners close to each operation, with whom we have long- standing relationships. In these regions, we mitigate our ﬁ bre supply risk through a combination of approaches which include both short- and long-term wood supply agreements and shareholdings in wood sourcing co-operatives. An important consideration on ﬁ bre supply is the potential impact of climate change on forests and wood plantations. In South Africa, we mitigate the risk of drought and pest attacks through an intensive focus on species and hybrid development that can be adapted to changing climatic regimes. In addition, we conduct extensive research into pest control and disease immunity. Our ﬁ re prevention strategy is based on community co-operation and fuel load management. In North America, the climate change risk is not as immediate as it is in Southern Africa and is more likely to affect us only in the medium- to long-term. Europe’s non-integrated mills which source ﬁ bre from South America, where conditions are similar to Southern Africa, could be affected by climatic conditions in the medium-term. Fibre certifi cation We are advantaged by the nature of our major raw material, which is renewable wood ﬁ bre from sustainably managed forests and plantations. Our operations are certified in accordance with internationally-recognised, independent programmes, such as Forest Stewardship Council (FSC), Programme for the Endorsement of Forest Certiﬁ cation (PEFC) and Sustainable Forestry Initiative (SFI®). Our certiﬁ cation assures stakeholders that we can trace ﬁ bre from its source to the end product. This gives our customers the assurance that the pulp and paper products they buy from us originate from plantations and forests that are managed in accordance with stringent environmental and social practices. In southern Africa, all our tree plantations are 100% FSC certiﬁ ed and 82% of the ﬁ bre used in operations in the reporting period was FSC certiﬁ ed. In Europe and North America, our total ﬁ bre procured was certiﬁ ed to the level of 75.4% (PEFC and FSC) and 61% (SFI® and FSC), respectively. Not only is wood ﬁ bre a renewable resource, it is recyclable and biodegradable – attributes which give our products a competitive edge in markets which are becoming increasingly environmentally aware. Supporting local communities Developing our people Recognising that there is a direct link between our people and our sustained business performance, we aim to develop our employees’ skills and abilities and provide them with opportunities to gain new experiences. Global training spend in 2010 was US$9.8 million (2009: US$9.1 million). Many of our mills are located in non-urban areas. We draw our workforce from local communities. Whenever possible, we employ the services of small- and medium-sized enterprises situated in the areas around our plantations and operations. Through our corporate social responsibility (CSR) programme, we invest in the socio-economic development of these communities. CSR spend in 2010 amounted to US$2.1 million, or 3.2% of net proﬁ t after tax. 2010 annual report 13 Energy Between 2005 and 2010, the amount of speciﬁ c (per ton of pulp produced) energy we purchased for the mills in operation in 2005 decreased by 33% and fossil-based carbon dioxide emissions have reduced by 30% (20% and 24% when taking into account all the mills in operation in 2005 and all the mills in operation in 2010 respectively). As paper and pulp production is highly energy intensive, the cost and availability of competitive and environmentally-friendly energy sources has both a ﬁ nancial and reputational impact on Sappi. Our high use of renewable energy (approximately 49% globally), derived from black liquor, sludges and biomass gives us a major advantage over other industrial companies. This results in high levels of energy self-sufﬁ ciency, lower levels of greenhouse gas emissions from fossil fuels and helps cushion us from proposed carbon taxes or other limits on fossil fuel use. As a result of reducing fossil base fuels, switching to combined heat and power generation (CHP) plants in Europe, as well as increasing our biomass co-generation, we have succeeded over the past ﬁ ve years in decreasing the amount of speciﬁ c (per ton of pulp produced) purchased energy and speciﬁ c fossil-based carbon dioxide emissions. We will continue to identify and evaluate renewable energy, co- generation and bioreﬁ ning opportunities. Our sustainability report is available on our website, www.sappi.com and on request in printed form. The black liquor produced in Sappi’s integrated mills is renewable and is the dominant fuel for Sappi’s operations (30.7%). ‘Own renewable fuel’ does not fall within the EN-3 deﬁ nition for direct fuel, but is included here for its relevance to Sappi’s energy self-sufﬁ ciency. As it is a biomass-derived fuel, it promotes reduced consumption of fossil fuels resulting in a decrease in greenhouse gas emissions. The next most dominant fuel is coal, used extensively in southern Africa. The decreasing trend in coal use is due to Gratkorn Mill which converted from coal to gas use. The increase in purchased steam is due to its use in Biberist Mill which was acquired by Sappi in 2009 as well as Cape Kraft Mill, which converted from coal-fired boilers to purchased steam. The decrease in own renewable fuel in 2010 was due to the closure of Usutu Mill, responsible for approximately four million GJ/annum. The declining trend in purchased HFO is due to our North American mills replacing HFO with purchased biomass. ‘Own renewable fuel’ does not fall within the EN-3 definition for direct fuel, but is included here for its relevance to Sappi’s sustainability. As this definition includes biomass-derived fuel, it indicates the extent to which we are able to generate our own fuel and hence reduce our consumption of fossil fuels. The North American Book Drive supported the cause for literacy Education outreach from the Sappi KwaDukuza Resource Centre in KwaZulu Natal New to the job – apprentices in Europe 14 Our markets Woodfree paper made from pulp produced in a chemical process Description and typical uses Coated Higher level of smoothness than uncoated paper achieved by applying a typically clay- based coating on the surface of the paper. As a result, higher reprographic quality and printability is achieved. Uses include marketing promotions and brochures, catalogues, corporate communications materials, direct mail, textbooks and magazines. Uncoated Uses include business forms, business stationery, tissue and photocopy paper as well as cut-size, preprint and ofﬁ ce paper. Certain brands are used for books, brochures and magazines. Speciality Can be either coated or uncoated. Uses include bags, labels, ﬂ exible and rigid packaging and release paper for casting innovative surface textures (eg artiﬁ cial leather, decorative laminates) for use in the textile, automotive, furniture and engineering ﬁ lm markets. Mechanical paper made from pulp produced in a mechanical process Coated A coated mechanical ﬁ bre-based paper, primarily used for magazines, catalogues and advertising material. Uncoated Mechanical ﬁ bre-based printing paper used primarily for the printing of books, and advertising inserts. Newsprint Uses include newspapers and advertising and inserts. Packaging products Packaging paper Heavy and lightweight grades of paper and board mainly used for primary and secondary packaging of fast moving consumer goods, agricultural and industrial products. Products include containerboard (corrugated shipping containers), sack kraft (multi-walled shipping sacks) and machine glazed kraft (grocery bags). Can be coated to enhance barrier and aesthetics properties. key brands Europe 2010 annual report 15 Our market in 2010 Demand trends Demand is still recovering from the low levels of 2009 (as the economy improves), although at a slower pace than in the ﬁ rst half of ﬁ nancial 2010. Magazine advertising pages and increased mailing of catalogues and direct mail have helped the demand recovery. Demand for coated woodfree paper is expected to continue to grow on a global level, but the impact of electronic media is likely to result in a gradual decline in paper consumption in developed economies over the long-term. Advertising, retail sales, and consumer demand for printed products are primary drivers of demand. After a slow start in the ﬁ rst few months, the uncoated market in Europe rebounded strongly throughout 2010. Over the last few years, strong demand in the cut-size business has helped the uncoated ofﬁ ce markets. There is a growing trend to print some brochures and magazines on uncoated grades such as Tauro. Strong recovery versus 2009 in the packaging and labelling markets. The release market also had a good recovery, particularly in terms of Asian demand. Flexible paper packaging driven by steady consumption growth in the healthy food and drink markets. Paper-based packaging is highly regarded as a sustainable solution. Release paper demand is expected to grow along with the textile and automotive industry, as well as in new and innovative applications. Share of sales 51% 7% 7% Demand still below 2008 levels, but a strong recovery from the low levels of 2009, particularly in the second half of ﬁ nancial 2010. Magazines, one of the main end-uses related to this product group, is doing marginally better than last year mainly due to growing consumption in special interest magazines. As with CWF, advertising expenditure is a key demand driver. 13% The changing school curriculum in South Africa is resulting in increased demand for book printing grades. As woodfree grades become more expensive, the demand for improved newsprint and mechanical uncoated grades increases. Some recovery in demand in South Africa for newsprint, but pagination is still low. Demand is highly dependent on newspaper circulation and retail advertising. Electronic media has led to newsprint demand declines in most markets across the globe. 7% After a weak start to 2010, global packaging markets and our primary market in South Africa started to recover as economic conditions improved. Packaging demand is driven by population growth, higher standards of living, urbanisation and globalisation. Paper packaging is seen as playing an increasingly important role in an environmentally-conscious world. North America South Africa 16 Our markets continued Pulp Description and typical uses Paper pulp Main raw material used in production of printing, writing and packaging paper. Pulp is the generic term that describes the cellulose ﬁ bre derived from wood. These cellulose ﬁ bres may be separated by mechanical, thermo mechanical or chemical processes. The chemical processes involve removing the glues (lignins) which bind the wood ﬁ bres, to leave cellulose ﬁ bres. Paper made from chemical pulp is generally termed ‘woodfree’. Uses include paper, paperboard and tissue. Chemical cellulose Manufactured by a similar process to paper grade pulp, but puriﬁ ed further to leave virtually pure cellulose ﬁ bres. Chemical cellulose is used in the manufacture of a variety of cellulose textile and non-woven ﬁ bre products, including viscose staple ﬁ bre (rayon), solvent spun ﬁ bre (lyocell) and ﬁ lament. It is also used in various other cellulose-based applications in the food, ﬁ lm, cigarette, chemical and pharmaceutical industries. These include the manufacture of acetate ﬂ ake, microcrystalline cellulose, cellophane, ethers and moulding powders. The various grades of chemical cellulose are manufactured in accordance with the speciﬁ c requirements of customers in different market segments. The purity of the chemical cellulose is one of the key determinants of its suitability for particular applications with the purer grades of chemical cellulose generally supplied into the speciality segments. Timber products Sawn timber for construction and furniture manufacturing purposes. Publications printed on coated ﬁ ne paper continue to play an important role in communications, advertising Publications printed on coated ﬁ ne paper continue to play an important role in communications, advertising and promotion and promotion Light and heavyweight paper and board is widely used in packaging for consumer goods 2010 annual report 17 Our market in 2010 Demand trends Share of sales The global pulp market was characterised by increasing demand, rapidly increasing prices and some supply shocks in 2010. With gradually improving global demand for paper products, demand for paper pulp is expected to continue to recover. The global chemical cellulose market remained strong throughout 2010 and demand in many cases exceeded supply. Chemical cellulose has a wide range of applications, demand for many of which are expected to continue growing at good rates. The textile uses in particular are predicted to show increasing levels of growth as the growth in the supply of cotton becomes increasingly constrained. 14% The South African timber market was weak in 2010 with lower demand and an excess of supply. As consumer and housing markets recover in South Africa, demand for timber products is expected to recover. 1% Our chemical cellulose business is well placed as a result of the strong growth in demand for viscose ﬁ bres. Viscose fashion garments are manufactured from textiles made from chemical cellulose 18 Our leadership Independent non-executive directors Daniël (Danie) Christiaan Cronjé Chairman Professor Meyer Feldberg Lead independent director Daniël (Danie) Christiaan Cronjé Age: 64 Qualiﬁ cations: BCom (Hons), MCom, DCom Nationality: South African Appointed: January 2008 Sappi board committee memberships  Human resources and transformation committee (Chairman)  Nomination and governance committee (Chairman) (Attends audit committee meetings and compensation committee meetings ex ofﬁ cio) Other board and organisation memberships  Die Dagbreek Trust (Chairman)  Eqstra Holdings Limited (Chairman) Skills, expertise and experience Dr Cronjé retired in July 2007 as chairman of both ABSA Group Limited and ABSA Bank Limited (a leading South African Banking organisation in which Barclays plc obtained a majority share in 2005). Dr Cronjé had been with ABSA Group since 1975 and held various executive positions including group chief executive for 4 years and chairman for 10 years. Prior to that Dr Cronjé was lecturer in Money and Banking at Potchefstroom University. Professor Meyer Feldberg Age: 68 Qualiﬁ cations: BA, MBA, PhD Nationality: American Appointed: March 2002 Sappi board committee memberships  Compensation committee (Chairman)  Nomination and governance committee Other board and organisation memberships include  British American Business Council (Advisory Board member)  Columbia University Business School  Macy’s, Inc  Morgan Stanley (Senior Adviser)  New York City Ballet  New York City Global Partners (President)  PRIMEDIA, Inc James (Jim) Edward Healey Nkateko (Peter) Mageza Deenadayalen (Len) Konar  Revlon, Inc  UBS Global Asset Management  University of Cape Town Graduate School of Business Skills, expertise and experience Professor Feldberg is currently serving as a Senior Advisor to Morgan Stanley. His career has included teaching and leadership positions in the Business Schools of the University of Cape Town, Northwestern and Tulane. He served as president of Illinois Institute of Technology for three years and as dean of Columbia Business School for 15 years. He is currently dean emeritus and professor of leadership at Columbia Business School. He has served on the Council of Competitiveness in Washington, DC. In 2001, the International Centre in New York honoured Professor Feldberg as a distinguished foreign- born American who has made a signiﬁ cant contribution to American life. James (Jim) Edward Healey Age: 69 Qualiﬁ cations: BSc (Public Accounting), Honorary Doctor (Commercial Science), Certiﬁ ed Public Accountant (USA) Nationality: American Appointed: July 2004 Sappi board committee memberships  Audit committee  Human resources and transformation committee  Sappi Fine Paper North America audit committee (Chairman) Skills, expertise and experience He has held various senior ﬁ nancial positions in a career spanning 37 years. In 1995 Mr Healey became vice president and treasurer of Bestfoods, formerly CPC International Inc. In 1997 he became executive vice president and chief ﬁ nancial ofﬁ cer of Nabisco Holdings Inc, one of the world’s largest snack food manufacturers, a position from which he retired at the end of 2000. Deenadayalen (Len) Konar Age: 56 Qualiﬁ cations: BCom, MAS, DCom, CA (SA) Nationality: South African Appointed: March 2002 Sappi board committee memberships  Audit committee (Chairman)  Nomination and governance committee  Human resources and transformation committee Other board and organisation memberships include  Exxaro Resources Limited (Chairman)  Illovo Sugar Limited  Lonmin plc  JD Group Limited  Mustek Limited (Chairman)  South African Reserve Bank  Steinhoff International Holdings Limited (Chairman) Skills, expertise and experience Previously professor and head of the department of Accountancy at the University of Durban, Westville, Dr Konar is a member of the King Committee on Corporate Governance in South Africa and the SA Institute of Directors, past member and chairman of the external audit committee of the International Monetary Fund and member of the Safeguards Panel and Implementation Oversight Panel of the World Bank (Co-Chairman). Nkateko (Peter) Mageza Age: 55 Qualiﬁ cations: FCCA (UK) Nationality: South African Appointed: January 2010 Sappi board committee memberships  Audit committee  Human resources and transformation committee Other board and organisation memberships  Bidvest Group Limited  Ethos Private Equity Fund  Rainbow Chickens Limited  Remgro Limited  MTN Group Limited Skills, expertise and experience Mr Peter Mageza joined the Sappi Board after having held senior executive positions across a wide range of industries. He is a former Group Chief Operating Ofﬁ cer and Executive Director of ABSA Group Limited, Assistant General Manager at Nedcor Limited and Chief Executive Ofﬁ cer of Autonet, the Road Passenger and Freight Logistics Division of Transnet Limited. 2010 annual report 19 Independent non-executive directors continued Helmut Claus-Jurgen Mamsch* Karen Rohn Osar Sir Anthony Nigel Russell Rudd John (Jock) David McKenzie Bridgette Radebe Bridgette Radebe Age: 50 Qualiﬁ cations: BA (PolSc and Socio) Nationality: South African Appointed: May 2004 Helmut Claus-Jurgen Mamsch* Age: 66 Nationality: German Appointed: January 2004 Sappi board committee memberships  Audit committee  Compensation committee  Sappi Fine Paper Europe audit committee (Chairman) Other board and organisation memberships  Anita-Thyssen-Stiftung  GKN plc. Skills, expertise and experience Mr Mamsch studied economics at Deutsche Aussenhandels-und Verkehrs-Akademie, Bremen and also received training in business administration and shipping in Germany, the UK and Belgium. He worked for 20 years in international trade and shipping. In 1989 he joined VEBA AG (now E ON AG), Germany’s largest utility-based conglomerate. From 1993 to 2000 he was a VEBA AG management board member and, as from 1998, responsible for their US electronic businesses and their corporate strategy and development. In 1997 he joined Logica as a non-executive director and until 2007 was their deputy chairman. Until July 2010 he was non-executive Chairman of Electrocomponents pls. * Retiring at the end of December 2010. John (Jock) David McKenzie Age: 63 Qualiﬁ cations: BSc Chemical Engineering (cum laude), MA Nationality: South African Appointed: September 2007 Sappi board committee memberships  Compensation committee  Sustainability committee (Chairman) Other board and organisation directorships  Accelerate Cape Town (Chairman)  Coronation Fund Managers  University of Cape Town Foundation (Chairman)  WESGRO  Save the Children (Cape) Skills, expertise and experience Mr McKenzie joined the Sappi board after having held senior executive positions globally and in South Africa. He is a former president for Asia, Middle East and Africa Downstream of the Chevron Texaco Corporation and also served as the chairman and chief executive ofﬁ cer of the Caltex Corporation. He was a Member of the Singapore Economic Development Board from 2000 – 2003. Karen Rohn Osar Age: 61 Qualiﬁ cations: MBA (Finance) Nationality: American Appointed: May 2007 Sappi board committee memberships  Audit committee Other board and organisation memberships  Innophos Holdings, Inc. (also Chairperson of Audit Committee)  Reader’s Digest Association  Webster Financial Corporation Skills, expertise and experience Ms Osar was executive vice president and chief ﬁ nancial ofﬁ cer of specialty chemicals company Chemtura Corporation until her retirement in March 2007. Prior to that, she held various senior management and board positions in her career. She was vice president and treasurer for Tenneco, Inc and also served as chief ﬁ nancial ofﬁ cer of Westvaco Corporation and as senior vice president and chief ﬁ nancial ofﬁ cer of the merged MeadWestvaco Corporation. Prior to those appointments she spent 19 years at JP Morgan and Company, becoming a managing director of the Investment Banking Group. She has chaired several board audit committees. Sappi board committee memberships  Human resources and transformation committee Other board and organisation memberships  Mmakau Mining (Pty) Ltd (Executive Chairperson)  South African Mining Development Association (President)  Mineral and Mining Development Board (Former Vice Chairman)  New Africa Mining fund (founder and Board Trustee) Skills, expertise and experience Ms Radebe was the ﬁ rst black South African deep level hard rock mining entrepreneur in the 1980s. She has more than a decade of experience in contract mining, mining construction and mining mergers and acquisitions. She is founder of Mmakau Mining which has investments in platinum, coal, chrome and gold mines as well as shaft sinkers. She participated in the design of the South African Mining Charter and present mining legislation. Sir Anthony Nigel Russell Rudd Age: 63 Qualiﬁ cations: DL, Chartered Accountant Nationality: British Appointed: April 2006 Sappi board committee memberships  Compensation committee  Nomination and governance committee Other board and organisation memberships BAA Limited (Chairman) Invensys plc (Chairman) Skills, expertise and experience Sir Nigel Rudd has held various senior management and board positions in a career spanning more than 35 years. He founded Williams plc in 1982 and the company went on to become one of the largest industrial holding companies in the United Kingdom. He was knighted by the Queen for services to the manufacturing industry in the UK in 1996 and holds honorary doctorates at both the Loughborough and Derby Universities. In 1995 he was awarded the Founding Societies Centenary Award by the Institute of Chartered Accountants. He is a Deputy Lieutenant of Derbyshire and a Freeman of the City of London. 20 Our leadership continued Non-executive directors Executive directors Mohammed Valli (Valli) Moosa Rudolf Thummer Roeloff (Ralph) Jacobus Boëttger Rudolf Thummer Age: 63 Qualiﬁ cations: Dr Techn, Dipl-Ing Nationality: Austrian Appointed: February 2010 Sappi board committee memberships  Sustainability committee Skills, expertise and experience Dr Thummer joined the Sappi Board after having served many years in the pulp and paper industry. He joined Hannover Papier in 1979 (later purchased by Sappi) as Manager of Research and Development. In 1982, he became the Paper Mill Manager at Alfeld mill. In 1990 he was appointed Technical Director of Alfeld mill. In 1992, Dr Thummer became an Executive Board Member of the Hannover Papier Group, responsible for Manufacturing at the Alfeld and Ehingen mills. In 1998 he moved to Sappi Fine Paper Europe based in Brussels as Technical Director and Executive Board Member. He served as Group Head Technology of Sappi Limited from 1 January 2006 up to his retirement at the end of December 2007. Mohammed Valli (Valli) Moosa Age: 53 Qualiﬁ cations: BSc (Mathematics) Nationality: South African Appointed: August 2010 Other board and organisation memberships  Auditor General’s Advisory Committee (South Africa)  Anglo Platinum Limited (deputy chairperson and lead independent director)  Imperial Holdings Limited  Lereko Investment (Pty) Ltd and various other associate companies of Lereko Investment (Pty) Ltd  Real Africa Holdings Limited (Chairman)  Sanlam Limited  Sun International Limited (Chairman) Skills, expertise and experience Mr Moosa is currently the Deputy Chairman of Lereko Investments (Pty) Ltd, Sappi’s Strategic Black Economic Environmental Affairs and Tourism, partner. He has held numerous leadership positions across business, Government, politics and civil society in South Africa. To name but a few, he was South African Minister of Environmental Affairs and Tourism, the President of the IUCN (International Union for the Conservation of Nature), Chairman of the UN Commission for Sustainable Development, and he was a long serving National Executive Committee member of the African National Congress (ANC). Chief executive ofﬁ cer Mark Richard Thompson Chief ﬁ nancial ofﬁ cer Roeloff (Ralph) Jacobus Boëttger Age: 49 Qualiﬁ cations: BAcc Hons, CA (SA) Nationality: South African Appointed: July 2007 Sappi board committee memberships Attends meetings of all board committees by invitation Skills, expertise and experience At the age of 34 he was appointed chief executive ofﬁ cer of Safair and the next year appointed to the executive committee of Safmarine Limited. From 1998 until July 2007 he was with Imperial Holdings when Imperial acquired Safair. From 2002, he was an executive director of Imperial Holdings with responsibility for their local and international logistics operations, the aviation division and the heavy commercial vehicle distribution operations. His ﬁ eld of responsibility encompassed businesses operating in Southern Africa, numerous European countries, the Middle East and Asia. He is well versed in managing an operation with diverse cultures. Mark Richard Thompson Age: 58 Qualiﬁ cations: BCom, BAcc, LLB, CA (SA) Nationality: South African Appointed: August 2006 Sappi board committee memberships Attends audit committee meetings by invitation Skills, expertise and experience Mr Thompson joined Sappi in 1999 as group corporate counsel and was appointed to his present position in August 2006. Prior to joining Sappi, he was group treasurer at Anglo American, managing director of Discount House Merchant Bank and prior to that head of the corporate ﬁ nance division of Central Merchant Bank. 2010 annual report 21 Corporate and divisional management Sappi Limited Chief executive ofﬁ cer *Ralph Boëttger (49) BAcc Hons, CA (SA) Chief ﬁ nancial ofﬁ cer *Mark Thompson (58) BCom, BAcc, LLB, CA (SA) Group ﬁ nancial manager John Shaw (34) BCom, PG Dip Man Acc, PG Dip Acc, CA (SA) Group ﬁ nancial controller Laurence Newman (54) BCom, BAcc, CA (SA) Group head internal audit Roland Agar (46) BCom BAcc, CA (SA) Group internal control and risk manager Wouter van den Heever (47) BCom Hons, BCompt, MCom, CA (SA), CPA Group management accountant Wikus van Zyl (42) BCom Hons, CA (SA) Group tax manager Bernd Ross (51) MS (Economics and Business Administration) Group treasurer Jörg Pässler (50) BCom Hons, MCom, HDip Tax, CAIB (SA) Group head technology *Andrea Rossi (56) BSc (Engineering) Hons, C Eng Chief information ofﬁ cer Bradley Coward (55) Grad Dip (Corporate Direction and Business Management), Cert (Senior Management and Leadership Development) Group head strategic development *Robert Hope (58) BA Hons (Economics), MRICS Group investor relations manager Graeme Wild (38) BSc (Forestry), MBA Group head human resources *Lucia Swartz (53) BA, Dip HR Group head corporate affairs André Oberholzer (44) BCom (Law) Group head legal and sustainability Ria Sanz (45) BCom, LLB, HDip Tax, Admitted Attorney Group Secretary Denis O’Connor (59) BA LLB Sappi Fine Paper Europe Chief executive ofﬁ cer *Berry Wiersum (55) MA (Medieval and Modern History) Chief ﬁ nancial and IT ofﬁ cer Glen Pearce (47) BCom Hons, CA (SA) General counsel Hannes Boner (47) lic iur, DHEE, Admitted Attorney Human resources director Rainer Neumann (48) MS (Administrative Sciences), MS (Industrial Relations and HRM) Manufacturing, research and development director Mat Quaedvlieg (60) BS (Electronics) Marketing and sales director Marco Eikelenboom (43) MS (Economics and Business Administration) Supply chain, procurement and speciality paper director Gregory Gettinger (48) PhD (Economics and Business Administration) Sappi Fine Paper North America President and chief executive ofﬁ cer *Mark Gardner (55) BSc (Industrial Technology) Vice president and chief ﬁ nancial ofﬁ cer Annette Luchene (48) BS (Accounting), MBA Executive vice president strategic marketing and chief sustainability ofﬁ cer Jennifer Miller (55) BA (Economics), Juris Doctor Vice president corporate development and chief information ofﬁ cer Anne Ayer (45) BA (Psychology), MBA Vice president human resources and general counsel Sarah Manchester (45) BA (History), Juris Doctor Vice president manufacturing John Donahue (55), BS (Chemical Engineering) Vice president release and technical specialties businesses Bob Weeden (59) BS (Chemistry), MS (Management) Vice president sales Bob Forsberg (48) BA (Economics and Art History) Vice president supply chain Randy Rotermund (48) BS, Imaging Technology, MBA Sappi Southern Africa Chief executive ofﬁ cer *Alex Thiel (49) BSc (Mechanical Engineering), MBA (Financial Management and IT)*** Finance director Colin Mowatt (53) BCom Acc, CA (SA), EDP, MBL Human resources director Esther Letlape (43) BAdmin Hons (Industrial Psychology) Information technology director Deon van Aarde (50) BCompt Technical director Bertus van der Merwe (57) BSc, MBA, HDip (Engineering) Regional procurement director Nat Maelane (51) MDP, SEP Strategy and business development director Tyrone Hawkes (43) BCom Hons, CA (SA) Sappi Chemical Cellulose Managing director Alan Tubb (60) BSc (Electrical Engineering), GCC (Mines and Works), BCom** Sappi Forests Managing director Hendrik de Jongh (55), NDip (Elec), GCC (Elec), MDP Sappi Paper and Paper Packaging Marketing executive director Dinga Mncube (50) Dip (Forestry), BSc (Forest Management), MSc (Forest Products), Dip (Business Management), MCom Manufacturing director Pat McGrady (53), BSc (Electrical Engineering), GCC (Factories), EDP Sappi Trading Chief executive ofﬁ cer Wayne Rau (48) HND (Marketing), Senior Executive Programme Financial director Henri Kirsten (57) BCom, BCompt Hons, CA (SA) * Group executive committee. ** On 01 January 2011 Gary Bowles (50) BSc (Electrical Engineering), GCC (Electrical), Global Executive Development Programme, Production Management Diploma, will replace Alan Tubb who will be retiring at the end December 2010. *** Appointed on 01 December 2010. 22 Review of operations Sappi Fine Paper Quality control is an ongoing commitment in producing our products Review of operations Sappi Fine Paper 2010 annual report 23 Printed communication remains effective, cost-efﬁ cient and powerful in delivering messages to and eliciting actions from target audiences. Printers use Sappi’s coated graphics papers because of its quality and the technical support that we provide. Publishers, advertising agencies, designers and corporate end-users rely on Sappi’s innovations, sustainable practices and quality products when choosing paper for calendars, catalogues, brochures, books, premium magazines, direct mailings and annual reports. Suppliers, converters and end-use customers also rely on our coated and uncoated speciality paper, such as paper used in ﬂ exible packaging, and casting release paper, used in the manufacture of synthetic leather and decorative laminate products. Our range of uncoated graphic and business papers, our technical support services and research and development facilities, as well as our close interaction with our customers across the globe, ensure that we help these customers thrive in their businesses. Sappi Fine Paper is approximately 68% integrated in terms of pulp supply. On a regional basis, we purchase approximately half of our pulp requirements in Europe and are net sellers of pulp in North America. Divisions Mills Products produced Capacity (’000 tons) Paper Pulp Employees* Sappi Fine Paper North America Cloquet Mill Bleached chemical pulp for own consumption and market pulp Coated woodfree paper Somerset Mill Bleached chemical pulp for own consumption and market pulp Coated woodfree paper Westbrook Mill Coated speciality paper Total Sappi Fine Paper North America Alfeld Mill Bleached chemical pulp for own consumption Coated woodfree paper, coated and uncoated speciality paper Biberist Mill Coated woodfree paper, uncoated woodfree paper Ehingen Mill Bleached chemical pulp for own consumption and market pulp Coated woodfree paper Gratkorn Mill Bleached chemical pulp for own consumption Coated woodfree paper Kirkniemi Mill Bleached mechanical pulp for own consumption Coated mechanical paper Sappi Fine Paper Europe Lanaken Mill Bleached chemi-thermo mechanical pulp for own consumption Coated mechanical paper Maastricht Mill Coated woodfree paper Nijmegen Mill Coated woodfree paper Stockstadt Mill Bleached chemical pulp for own consumption and market pulp Coated woodfree paper, uncoated woodfree paper Total Sappi Fine Paper Europe Total Sappi Fine Paper * Rounded to nearest 10 and excludes corporate head ofﬁ ce employees. 2,250 455 490 945 125 135 255 330 180 150 1,175 2,120 6,660 8,910 330 795 35 1,160 330 500 250 950 730 500 280 240 430 4,210 5,370 24 Sappi Fine Paper continued * Where the product is manufactured. Europe Our primary objective was to return the business to proﬁ tability. Achieving the target level of synergies related to the acquisition of M-real’s coated graphic paper business at the end of 2008 was an important element in this. We achieved our target level of EUR120 million of synergies during the year, well ahead of the target date. The synergies achieved include procurement beneﬁ ts, sales and administration cost reductions, asset optimisation (including the beneﬁ ts of acquiring order books), product recipe changes and manufacturing efﬁ ciency. Despite these achievements and the signiﬁ cant improvement in the business’ performance, we have not yet delivered acceptable proﬁ tability or returns from the business. In response to continued weak demand for coated mechanical paper, we undertook further restructuring during the year, closing the 210,000 ton per annum Kangas Mill in Finland. We are currently implementing our innovative service offering which will allow customers to select the combination of service value level most appropriate to their requirements. The implementation follows extensive interaction with our customers and application of lessons learnt in the turnaround of our North American business. Our goal is to ﬁ nd further ways to improve our and our customer’s proﬁ tability. We anticipate having to comply with lower carbon emissions targets over the next few years. We are currently engaged, as part of an industry-wide effort, in trying to ensure that the advantages of the forest products industry and its efﬁ cient multi-purpose renewable resource base are recognised by legislators and that we are not adversely impacted by irrational preferences given to wasteful use of forest resources as fuel alone. The European Commission imposed provisional anti-dumping duties with respect to imports of coated woodfree paper from China with effect from 18 November 2010. The duties range from 19.7% to 39.1% and will help to re-establish a level playing ﬁ eld in European markets. 2010 annual report 25 Source: EMGE, September 2010 Source: EMGE, September 2010 North America The business continued the turnaround achieved in the second half of 2009 and delivered a good operating performance for the year. The business beneﬁ ted from rising pulp prices and higher pulp production in the year, up 9% on 2009. The business’ integrated approach in identifying and meeting customer’s needs, optimising product design, driving procurement and operational efﬁ ciencies continued to contribute to improved margins for the business. We reduced ﬁ xed costs further during the year both in absolute, and in per unit terms. The speciality business (casting release paper for textured surfaces) had strong demand for its products, particularly from Asia. The business pioneered a new process, which eliminates six steps in the production of ﬂ ooring laminates, with a major European ﬂ ooring producer. In the latter part of the year, we reduced sales of pulp in preparation for the Somerset pulp mill outage which started on 01 October 2010. During the outage, the mill’s recovery boiler was extensively upgraded to further reduce energy costs and the mill’s reliance on fossil fuels (see case study below). The availability of alternative fuel tax credits ended on 31 December 2009. During the 2010 ﬁ nancial year, we realised approximately US$50 million of credits, which were reported as special items, and received US$74 million of cash in connection with such credits. During October 2010, the US International Trade Commission imposed anti-dumping and countervailing duties on imported coated sheet paper from Indonesia and China. The duties which range from 27.1% to 338.7% are expected to re-establish a level playing ﬁ eld in the US. Going forward We expect a further gradual improvement in demand for coated paper in our major markets. The supply/demand balance is therefore also expected to improve further in those markets; however, the balance in some of our export markets is likely to be impacted by signiﬁ cant new capacity being built in China. Our businesses continue to explore opportunities to enhance performance including through innovation, rationalisation or consolidation and most particularly by working more closely with customers. We continue to expect signiﬁ cant further consolidation of the industry. 26 Review of operations Sappi Southern Africa Sappi Saiccor Mill produces 800,000tpa of chemical cellulose 2010 annual report 27 Review of operations Sappi Southern Africa Sappi was formed in South Africa in 1936 to serve South African consumers with locally produced papers. Sappi Paper and Paper Packaging continues this tradition by innovating and developing new products to meet local demand for newsprint, coated and uncoated ﬁ ne papers, ofﬁ ce and business papers (stationery, printing and photocopying), security and speciality papers (passports and election ballot papers), containerboard (eg cardboard boxes used for exporting fruit) and packaging paper (eg bags for cement, dog food, potatoes and shopping bags). Bleached paper-pulp is sold on the South African and global paper markets. Chemical cellulose, a product made from the wood from our plantations, is sold to converters for use in a wide range of consumer products, such as fashion clothing, cellular phone screens, cellophane wrap for sweets and ﬂ owers, pharmaceutical and household products and make-up, like lipstick. We are the world’s largest manufacturer of chemical cellulose and we export almost all of the product that is produced at Sappi Saiccor Mill, KwaZulu Natal. Sappi Forests supplies 70% of the wood requirements of Sappi Southern Africa from both our own and managed commercial timber plantations of 555,000 hectares, currently with more than 35 million tons of standing timber. All wood grown on Sappi owned land is Forest Stewardship Council (FSC©) and ISO 9000 certiﬁ ed. Approximately 150,000 hectares of our plantation land is protected and managed by Sappi Forests to conserve the natural habitat and biodiversity found there, including indigenous forests and wetlands. Sappi Southern Africa is a net seller of pulp that effectively hedges pulp purchases by our European business. Divisions Plantations Products produced Hectares m3 Employees* Capacity (’000s) Sappi Forests KwaZulu Natal Plantations (pulpwood and sawlogs)*** Mpumalanga Plantations (pulpwood and sawlogs) Swaziland Sawmills Plantations (pulpwood) Sawn timber (m3) Total Sappi Forests Divisions Mills/Operations Products produced 231 258 66 555 85 85 1,150 Capacity (’000s) Paper Pulp Employees* Sappi Chemical Cellulose Saiccor Mill Chemical cellulose 800 1,220 Adamas Mill Uncoated woodfree paper (specialities) Cape Kraft Mill Waste based linerboard and corrugating medium Enstra Mill Bleached chemical pulp for own consumption Uncoated woodfree and business paper Ngodwana Mill Unbleached kraft pulp for own consumption, bleached chemical pulp for own consumption and market pulp Sappi Paper and Paper Packaging Mechanical pulp for own consumption Kraft and white top linerboard Newsprint Stanger Mill Bleached bagasse pulp for own consumption Coated woodfree paper and tissue paper Tugela Mill Unbleached kraft and semi-chemical pulp for own consumption Kraft linerboard and corrugating medium Other kraft packaging paper 40 60 200 240 140 110 300 90 105 410 100 60 350 Sappi ReFibre** Waste paper collection and recycling for own consumption Total Sappi Paper and Paper Packaging Total Sappi Southern Africa 1,180 1,180 200 1,225 2,025 4,080 6,450 * Rounded to nearest 10 and excludes corporate head ofﬁ ce. ** Sappi ReFibre collects waste paper in the SA market which is used to produce packaging paper. *** Plantations include title deed and lease area as well as projects. 28 Sappi Southern Africa continued Access to low cost plantation ﬁ bre is a core element of the group’s strategy. We have made good progress with rehabilitating the plantations lost to ﬁ re in 2007 and 2008. We planted 26,000 hectares during the year of which 6,000 hectares related to rehabilitation, including our plantations in Swaziland. We acquired 14,500 hectares of developed plantations close to our Ngodwana Mill during the year and continue to work with communities and governments in southern Africa to achieve further afforestation. Our research into improving our plantation genetics, not only for overall yield but to achieve specific properties, continues to progress, assisted by our involvement in the sequencing of the eucalyptus genome. Saiccor Mill continued to ramp-up production after its major expansion and achieved a good level of efﬁ ciency and consistency in the latter part of the year. The improved consistency resulted in reduced variable costs as the year progressed, particularly in respect of energy costs. The paper and paper packaging paper mills had mixed performances with signiﬁ cant opportunity for improvement. We reorganised the combined business to ensure a more effective interface with our customers, many of whom buy a wide-range of different products from us. We also increased the focus on manufacturing, including the appointment of a head of manufacturing, for the business, which will assist with the sharing of best practices, implementation of continuous improvement techniques and improved procurement. The Usutu Pulp Mill was permanently closed in January 2010. We are investing in the rehabilitation of the Usutu plantations which were extensively damaged by ﬁ res in 2007 and 2008. We believe that the Usutu plantations are among the best tree growing sites in southern Africa. During the year, we entered into an agreement to supply renewable energy to the power utility Eskom, from Saiccor Mill. We are also in discussions to sell the additional power that we are able to generate from our Ngodwana Mill. We will continue to explore the feasibility of further investment to increase our power of self- sufﬁ ciency and reduce our energy costs. We launched the “I Choose Paper” campaign during the year to inform our stakeholders about the advantages of choosing our products manufactured from renewable, sustainable resources. The campaign has generated signiﬁ cant interest. Going forward Markets for chemical cellulose are currently strong and expected to remain strong for the year ahead. Although we sell mainly on contracted terms, spot prices are currently at record highs with no sign of abatement. Demand in our southern African markets is expected to continue its gradual improvement. The exchange rate of the Rand to the US Dollar will have an impact on the performance of the business with a direct impact on export revenues and an indirect impact on the domestic sales levels and prices. A strengthening Rand would be unfavourable for the performance of the southern African business. We expect the beneﬁ t of our reorganisation of the paper and packaging paper business to improve performance during the year as a result of improved customer focus and improving efﬁ ciencies. Paper plays a key role in promoting literacy throughout the developing world and many researchers contend that printed materials are more conducive to an in-depth reading experience than electronic media. 2010 annual report 29 Chemical cellulose manufactured at Sappi Saiccor Mill is exported worldwide 30 Chief ﬁ nancial ofﬁ cer’s report Sappi group review Section 1 Mark Richard Thompson Chief ﬁ nancial ofﬁ cer On the opposite pages of this report we explain the business and operating performance of each of the geographic components of the group in more detail – this is important for a better understanding of the results of the group as a whole. Our operating performance For the year ended September 2010, our operating performance improved substantially compared to ﬁ scal 2009 but did not reach the levels achieved in ﬁ scal 2008, nor our target Return on Capital Employed (ROCE). We are of the opinion that operating proﬁ t excluding special items is a good indication of underlying operating performance as it excludes what we believe are items that are unusual, non-recurring and/or uncontrollable and are outside our ordinary day-to-day operations – special items are explained in section 2 later on in this report. Operating proﬁ t excluding special items for the past three years was as follows: Fiscal year: 2010 US$339 million 2009 2008 US$33 million US$366 million To achieve our target of a ROCE of at least 12%, operating proﬁ t excluding special items needs to improve to approximately US$500 million and we hope to get much closer to that target in ﬁ scal 2011. It is encouraging to note that in the ﬁ nal quarter of 2010, the group achieved its highest quarterly operating proﬁ t excluding special items (of US$129 million) for many years which, on an annualised basis, equates to a ROCE in excess of 12%. The two main reasons for the improved operating performance in 2010 are:  the better demand for our products in all our major markets compared to the very low levels seen in 2009 following the global economic crisis, resulting in sales volumes increasing by 18% compared to 2009; and  the improvement in operating margin (operating proﬁ t excluding special items to sales) from 0,6% in 2009 to 5,2% in 2010. continues on page 32 Regional operating review Sappi Fine Paper Europe Business summary Our European business consists of nine mills in six countries with an annual capacity to produce: Coated Woodfree paper Uncoated Woodfree paper Coated Mechanical paper Speciality paper Total paper Pulp Total capacity 2010 annual report 31 Metric tons ’000 2,600 280 1,230 100 4,210 1,175 5,385 More on our mills, their capacities and products are given on page 23 of this annual report. In 2010, the business consumed approximately 2.1 million tons of pulp in the production of its paper products – of this, it produced approximately 0.9 million tons and purchased approximately 1.2 million tons. In Europe, we have a market share of about 30% in coated woodfree paper, and 14% in coated mechanical paper. Operating performance Operating profi t excluding special items Volume (metric tons ’000) Sales Variable manufacturing and delivery costs Contribution Fixed costs Sundry income (costs) and consolidation entries Operating proﬁ t (loss) excluding special items 2010 3,796 2009 2,956 EUR million EUR per metric ton 2010 2009 2010 2009 2,664 (1,822) 842 (847) 61 56 2,120 (1,330) 790 (771) (10) 9 702 (480) 222 (223) 16 15 717 (450) 267 (261) (3) 3 The improved market conditions resulted in an increase in utilisation of our production capacity from 67% in ﬁ scal 2009 to 89% in ﬁ scal 2010. Sales volumes were 28% higher than in ﬁ scal 2009, which included only nine months of the coated paper business acquired from M-real in January 2009. Excluding the sales volume of the acquired business, sales volume for ﬁ scal 2010 increased by 20% compared to ﬁ scal 2009. Despite the improvement in market conditions, average selling prices realised during ﬁ scal 2010 were lower than those achieved in ﬁ scal 2009. Average realised prices in Euro terms decreased from EUR717 per ton in ﬁ scal 2009 to EUR702 per ton in ﬁ scal 2010. Selling prices started rising in the last six months of the ﬁ scal 2010 year. Our average selling price in Euro terms for the last quarter of ﬁ scal 2010 was EUR753 per ton compared to an average selling price of EUR677 per ton achieved in the last quarter of ﬁ scal 2009. continues on page 33 32 Chief ﬁ nancial ofﬁ cer’s report continued Sappi group review continued Section 1 Change in Segment reporting During the year we adopted IFRS 8 Operating Segments which requires that ﬁ nancial and descriptive information about the components of the business is reported on the basis that this information is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and evaluate performance. In addition to adopting IFRS 8, we have changed our reporting structure to a predominantly geographic basis as indicated below: Previously Sappi Fine Paper Europe Sappi Fine Paper North America Sappi Fine Paper South Africa Sappi Fine Paper Forest Products Sappi Group Now Sappi Fine Paper Europe Sappi Fine Paper North America Sappi Fine Paper Sappi Southern Africa Sappi Group The change is that Sappi Fine Paper South Africa now reports as a part of the re-named Sappi Southern Africa division and not as part of Sappi Fine Paper. This change has not had an impact on the group’s overall results or ﬁ nancial position. Other important features of our results In addition to the improved operating results, other important features of ﬁ scal 2010 are:  Special items, discussed in section 2 of this report, which overall had a small US$2 million positive effect on our operating proﬁ t this year but had a large US$106 million negative effect in 2009;  our higher ﬁ nance costs in 2010 following our re-ﬁ nancing towards the end of ﬁ scal 2009 – discussed in section 2 of this report;  the strong net cash generated in 2010 of US$341 million – discussed in section 3 of this report;  the reduction of net debt by a further US$355 million in 2010 to US$2,221 million, thereby making good progress towards our target to reduce net debt to below US$2.0 billion by 2012 – discussed in section 4 of this report; and  our strong liquidity position with cash-on-hand of US$792 million at the year end – discussed in section 4 of this report. At the net proﬁ t level we earned a rather modest US$66 million, but this was a signiﬁ cant improvement on the net loss of US$177 million in 2009. These and other matters are discussed in more detail later on in this report. Contents This report reviews the major elements of our: Section 2 Section 3 Section 4 and discusses our: Section 5 Section 6 Income statement Cash ﬂ ow Balance sheet Credit rating, and Share listing and share price performance Page 34 Page 48 Page 49 Page 54 Page 55 continues on page 34 2010 annual report 33 Regional operating review continued Sappi Fine Paper Europe continued Variable and delivery costs Variable manufacturing costs: Wood Energy Pulp Chemicals Other Delivery costs Total EUR million EUR per metric ton 2010 2009 2010 2009 179 262 559 469 143 210 136 250 301 369 116 158 47 69 147 124 38 55 46 85 102 125 39 53 1,822 1,330 480 450 We experienced signiﬁ cant input cost pressure during the year. During ﬁ scal 2010, our European business purchased in the open market approximately 57% of the pulp required for its paper production. Variable manufacturing cost per ton increased by 7% compared to ﬁ scal 2009, due mainly to a 44% increase in pulp costs per ton. This increase was offset to some extent by a decrease in purchased energy prices. Fixed costs EUR million Personnel Maintenance Depreciation Services and administration Total 2010 2009 460 88 168 131 847 418 82 153 118 771 Fixed costs increased by EUR76 million or 10% in ﬁ scal 2010 compared to ﬁ scal 2009. The major reason for this increase was the inclusion of the acquired business for 12 months in the ﬁ scal 2010 year compared to 9 months in 2009. Excluding the acquired business, ﬁ xed costs increased by EUR26 million or 4% in ﬁ scal 2010 compared to ﬁ scal 2009, mainly due to increased personnel and maintenance costs. Sundry income of EUR61 million for ﬁ scal 2010 included income from carbon emission trading, a positive inventory revaluation, intra-group insurance transfers in respect of the ﬁ re at Stockstadt Mill, and sales of by-products and services to third parties. continues on page 35 34 Chief ﬁ nancial ofﬁ cer’s report continued Sappi group review continued Section 2 Income statement Our group ﬁ nancial results can be summarised as follows: Sales volume (metric tons ’000) 7,894 18 6,707 US$ million US$ million % 2010 Change 2009 Sales revenue Variable manufacturing and delivery costs Contribution Fixed costs Sundry income (loss)* Operating proﬁ t excluding special items Special items Operating proﬁ t (loss) Finance costs Proﬁ t (Loss) before tax Taxation Net proﬁ t (loss) Basic earnings (loss) per share (US cents) 6,572 (4,117) 2,455 (2,164) 48 339 2 341 (255) 86 (20) 66 13 22 24 20 10 927 76 5,369 (3,322) 2,047 (1,970) (44) 33 (106) (73) (145) (218) 41 (177) (37) * Sundry income (loss) consists mainly of inventory revaluation, plantation fair value volume adjustments and external debtors securitisation costs. Sales volume In 2010, sales volume increased by 1.2 million tons to 7.9 million tons or 18% compared to 2009. The regional contri bu tions to sales volumes in 2010 and 2009 are shown below: Sales volume Metric tons ’000 Europe North America Southern Africa Sappi group 2010 3,796 1,354 2,744 7,894 % Change 28 6 11 18 2009 2,956 1,274 2,477 6,707 Demand for our products in all regions improved, leading to the 18% sales volume improvement compared to the depressed levels of 2009. Capacity utilisations improved in all regions as shown in the table below. As a group we took about 1.1 million tons of commercial downtime in 2009 compared to approximately 200,000 tons in 2010, most of this in Europe. Sales volume to capacity Percentage Europe North America Sappi Southern Africa* Sappi group * Pulp and paper operations only – Forestry not included. 2010 2009 89 93 88 90 67 83 84 74 continues on page 36 2010 annual report 35 Regional operating review continued Sappi Fine Paper North America Business summary Sappi Fine Paper North America owns and operates 3 mills located in the United States which have an annual capacity of: Coated woodfree paper Coated speciality paper Total paper Pulp Total capacity In approximate terms, the pulp balance of the business is as follows: Own pulp production Pulp purchases Pulp sales Pulp consumption Metric tons ’000 1,125 35 1,160 945 2,105 Metric tons ’000 932 151 (292) 791 Our market share of the North American coated woodfree paper market is currently approximately 25%. Operating performance Operating profi t excluding special items Volume (metric tons ’000) Sales Variable manufacturing and delivery costs Contribution Fixed costs Sundry income (costs) and consolidation entries Operating proﬁ t (loss) excluding special items 2010 1,354 2009 1,274 US$ million US$ per metric ton 2010 1,373 (827) 546 (461) 39 124 2009 1,295 (812) 483 (475) (10) (2) 2010 1,014 (611) 403 (340) 29 92 2009 1,016 (637) 379 (373) (8) (2) Our North American business delivered an outstanding performance in ﬁ scal 2010 as improved market conditions and business initiatives combined to result in a return on net operating assets of 12.9% and an operating proﬁ t margin of 9% for the year. Demand for coated woodfree products and market pulp improved and prices realised on pulp sales were better than in 2009. continues on page 37 36 Chief ﬁ nancial ofﬁ cer’s report continued Sappi group review continued Section 2 Exchange rates and their impact on the group’s results The group reports its results in US Dollars and the main exchange rates used in preparing the ﬁ nancial statements are: Income statement average rates Balance sheet closing rates 2010 2009 2010 2009 Euro (EUR) = US Dollar (US$) US Dollar (US$) = Rand (ZAR) 1.3658 7.4917 1.3657 9.0135 1.3491 7.0190 1.4688 7.4112 Two of our three geographic business units (Europe and Southern Africa) have home or functional currencies other than US Dollars (our reporting currency). The revenue and cost items of the two non- US Dollar units are translated into US Dollars at the average exchange rate for the period in order to arrive at the group revenue and costs in US Dollars. When exchange rates differ from one period to the next, the impact on group revenue and costs in US Dollars can be large, but largely offset one another at the net level (when netting costs against revenue). For this reason we isolate the exchange rate impact on revenue and costs by showing the regional revenue and cost items at 2009 exchange rates – we believe this facilitates a better understanding of the underlying movements in revenue and costs in the European and Southern African business. Compared to ﬁ scal 2009, exchange rates increased Sales by US$263 million but this was largely offset by the negative impact on variable and delivery costs of US$153 million and on ﬁ xed costs of US$98 million. Sales revenue Sales revenue increased by 22% or US$1.2 billion compared to 2009. This was due to the additional 1.2 million tons sold at the average price per ton of US$799 realised in local currencies in 2010 and an exchange rate beneﬁ t of US$263 million arising when translating the sales of our European and Southern African businesses into the weaker US Dollar in 2010. Sales revenue by region US$ million Europe North America Southern Africa Group at 2009 exchange rates Exchange rate impact Group as reported 2010 3,638 1,373 1,298 6,309 263 6,572 % Change 26 6 10 18 22 2009 2,895 1,295 1,179 5,369 – 5,369 As shown in the table below, at constant exchange rates the average selling price per ton for the group’s products of US$799 was very similar to 2009 (US$801 per ton). Prices per ton in Europe were 2% lower than in 2009 and, in Southern Africa, 4% higher than in 2009. In North America, price per ton was almost the same as in 2009. continues on page 38 2010 annual report 37 Regional operating review continued Sappi Fine Paper North America continued Sales volume increased by 6% year-on-year. The operations of the Muskegon Mill ceased six months into ﬁ scal 2009. Excluding these volumes in 2009, the increase was 11%. Capacity utilisation improved from 83% in 2009 to 93% in 2010. The average selling prices realised in ﬁ scal 2010 of US$1,014 per ton were marginally lower than the US$1,016 per ton realised in ﬁ scal 2009. Although average selling prices for paper products were slightly lower than 2009, we saw an improving trend in pricing towards the end of the year in-line with the improving market. The lower average paper prices were offset by a signiﬁ cant rise in the average pulp selling price. Overall sales increased by 6% to US$1,373 million. Variable and delivery costs Variable manufacturing costs: Wood Energy Pulp Chemicals Other Delivery costs Total US$ million US$ per metric ton 2010 2009 2010 2009 183 93 89 230 104 128 827 194 115 49 223 108 123 812 135 69 66 170 76 95 152 90 38 175 85 97 611 637 Variable manufacturing costs per ton of US$611 decreased by 4% compared to ﬁ scal 2009 due to a decrease in the price of wood, energy and chemicals, partially offset by an increase in purchased pulp. Fixed costs US$ million Personnel Maintenance Depreciation Services and administration Total 2010 2009 247 62 77 75 461 243 60 90 82 475 Fixed costs decreased in 2010 compared to 2009 due to a decrease in depreciation and the beneﬁ ts of ongoing cost reduction efforts in services and administration, offset by small increases in personnel and maintenance costs. Sundry income in ﬁ scal 2010 included a positive inventory revaluation and electricity sales. continues on page 39 38 Chief ﬁ nancial ofﬁ cer’s report continued Sappi group review continued Section 2 The exchange rate impact of US$34 per ton increased the overall price per ton realised in 2010 by 4% to US$833 per ton. Selling price per ton US$ per ton Europe North America Southern Africa* Group at 2009 exchange rates Exchange rate impact Group as reported 2010 959 1,014 706 799 34 833 % Change (2) – 4 – 4 2009 979 1,016 677 801 – 801 * Pulp and paper operations only – Forestry sales not included. Variable and delivery costs Compared to 2009, variable manufacturing and delivery costs increased by 24% or US$794 million to US$4.1 billion. This was caused by the higher volumes in 2010, a 1% increase in variable costs per ton in local currency and the US$153 million negative impact of translating the variable costs in Europe and Southern Africa into US Dollars. More details about our variable and delivery costs by region and for the group are shown in the tables below: Variable and delivery costs by region US$ million Europe North America Southern Africa Inter-company eliminations Group at 2009 exchange rates Exchange rate impact Group as reported Variable and delivery costs per ton US$ per ton Europe North America Southern Africa* Group at 2009 exchange rates Exchange rate impact Group as reported * Pulp and paper operations only – Forestry costs not included. 2010 2,488 827 753 (104) 3,964 153 4,117 2010 656 611 274 502 20 522 % Change 37 2 1 19 24 % Change 7 (4) (9) 1 5 2009 1,816 812 748 (54) 3,323 – 3,323 2009 615 637 302 495 – 495 continues on page 40 Regional operating review continued Sappi Southern Africa Business summary The annual capacities and products of the seven mills in our Southern African business are: Coated woodfree paper Uncoated woodfree paper Speciality paper Packaging paper Newsprint Tissue paper Total paper and packaging capacity Paper pulp Chemical cellulose pulp Total capacity 2010 annual report 39 Metric tons ’000 80 200 40 690 140 30 1,180 1,225 800 3,205 In addition, the business owns, leases or otherwise controls 555,000 hectares of land of which approximately 402,000 hectares is plantable with timber. This resource provides about 70% of the ﬁ bre requirements of the business. The paper and paper packaging products produced by our Southern African business are largely sold regionally, where we have strong market positions in most of these products. The business produces 1.2 million tons of paper pulp – some of this is sold and more-or-less an equivalent quantity is purchased. Thus, on a net basis, we are approximately self sufﬁ cient for our paper pulp requirements in Southern Africa. The 800,000 tons of chemical cellulose is almost exclusively exported to customers in Asia, Europe and North America. Operating performance Operating profi t excluding special items Volume (metric tons ’000) Sales Variable manufacturing and delivery costs Contribution Fixed costs Sundry income (costs) and consolidation entries Operating proﬁ t (loss) excluding special items 2010 2,744 2009 2,477 ZAR million ZAR per metric ton 2010 2009 2010 2009 11,695 (6,786) 4,909 (4,324) 419 1,004 10,627 (6,745) 3,882 (4,168) 439 153 4,262 (2,473) 1,789 (1,576) 153 366 4,290 (2,723) 1,567 (1,683) 178 62 As with our other businesses, the Southern African business experienced a recovery in demand for all major products during ﬁ scal 2010 after the severe decline in ﬁ scal 2009. continues on page 41 40 Chief ﬁ nancial ofﬁ cer’s report continued Sappi group review continued Section 2 Variable and delivery costs US$ million Variable manufacturing costs: Wood Energy Pulp Chemicals Other Delivery costs Total Fixed costs 2010 2009 706 626 929 1,050 259 547 4,117 663 584 543 868 210 454 3,322 Fixed costs increased by US$194 million (10%) to US$2.2 billion in 2010 mainly due to the negative impact of exchange rates (US$98 million) and the effect of having the additional ﬁ xed costs in Europe associated with the business acquired from M-real in January 2009 for the full year in ﬁ scal 2010 compared to only nine months in ﬁ scal 2009. The tables below show the make-up of ﬁ xed costs by region and by type of cost: Fixed costs by region US$ million Europe North America Southern Africa Inter-company eliminations Group at 2009 exchange rates Exchange rate impact Group as reported Fixed costs by type US$ million Personnel Maintenance Depreciation Services and administration Total 2010 1,157 461 480 (31) 2,066 98 2,164 % Change 10 (3) 4 5 10 2009 1,053 475 462 (20) 1,970 – 1,970 2010 2009 1,176 1,046 275 411 302 250 396 278 2,164 1,970 continues on page 42 2010 annual report 41 Regional operating review continued Sappi Southern Africa continued Overall sales volumes increased by 11% in ﬁ scal 2010 compared to ﬁ scal 2009. Demand for chemical cellulose was signiﬁ cantly better in ﬁ scal 2010 increasing by 18% compared to ﬁ scal 2009. Volumes in the paper and paper packaging business declined by 3% due to the closure of the Usutu Mill in January 2010 and, to a lesser extent, to production problems experienced at our Ngodwana Mill. Excluding the Usutu Mill volumes in 2009, volumes increased by 6% in ﬁ scal 2010 compared to 2009. During 2010, average chemical cellulose selling prices in US dollar terms increased by 26% compared to ﬁ scal 2009, but by only 11% in Rand terms due to the strengthening of the Rand to the US Dollar during ﬁ scal 2010. Average selling prices for paper and paper packaging products increased by 4% compared to ﬁ scal 2009. Overall, average prices including timber sales, were marginally lower than ﬁ scal 2009 at ZAR4,262 per ton. For the whole business, sales increased by 10% to ZAR11.7 billion compared to 2009. Variable and delivery costs Variable manufacturing costs: Wood Energy Pulp Chemicals Other Delivery costs Total ZAR million ZAR per metric ton 2010 2009 2010 2009 2,088 1,315 570 1,340 465 1,008 6,786 1,897 1,158 747 1,449 455 1,039 6,745 761 479 208 488 170 367 766 468 302 585 183 419 2,473 2,723 During ﬁ scal 2010, input costs per ton decreased by 9% to ZAR2,473 compared to ﬁ scal 2009, mainly due to a decrease in volumes of bought-in pulp and decreases in the input prices of chemicals and other costs. The decrease was also partly due to input costs normalising after the interrupted ramp-up of our Saiccor Mill and production curtailments during 2009. Fixed costs Personnel Maintenance Depreciation Services and administration Total ZAR million 2010 2009 1,982 1,844 699 765 878 697 750 877 4,324 4,168 Fixed costs increased by 4% to ZAR4,324 million. This increase was mainly due to a 7% increase in personnel costs due to the relatively high inﬂ ation environment in South Africa and the impact of a skills shortage on personnel costs, particularly in skilled technical functions. Maintenance and services expenses were well controlled and remained at similar levels to 2009. Sundry income consists mainly of the plantation volume fair value adjustment. 42 Chief ﬁ nancial ofﬁ cer’s report continued Sappi group review continued Section 2 Operating profi t excluding special items The contribution by each of our regions to the group operating proﬁ t excluding special items over the past three years was as follows: US$ million Europe North America Southern Africa Corporate and other Sappi group 2010 2009 2008 76 124 134 5 339 12 (2) 17 6 33 55 95 209 7 366 2010 was a great improvement over 2009 due to the better global economic conditions that prevailed in 2010 and the many improvements we have made to all our businesses. These improvements include:  the closures of three underperforming mills in the past two years – Kangas in Finland, Muskegon in the United States and Usutu in Swaziland;  the realisation of further synergies from the integration of the M-real coated business we acquired in January 2009;  our improved market position in Europe following the M-real acquisition which enabled us to put through three consecutive price increases on coated woodfree products, something that has not happened in Europe for nearly a decade – although not adequate to compensate fully for the high cost of bought-in pulp which prevailed for most of the year, these price increases helped us to maintain a small positive margin in our European business;  the good production performance, particularly in the second half of the year, of our Saiccor Mill in South Africa following completion of the 200,000 ton chemical cellulose expansion project in 2009; and  the many projects in all parts of the group to reduce manufacturing costs, improve customer relationships, simplify product portfolios and streamline logistics. Economic conditions permitting, we expect these actions to deliver further improvements to our operating performance in the future and lead to better operating results than the US$366 million operating proﬁ t excluding special items earned in 2008. North America did particularly well on all counts to deliver an operating proﬁ t excluding special items of US$124 million. Pulp prices, which rose rapidly during ﬁ scal 2010, impacted the split of operating proﬁ t between the regions – beneﬁ ting the Southern African and North American businesses (which are net sellers of pulp) and squeezing the margin of the European business (which buys-in approximately half of its pulp consumption). Also, the strong South African Rand compared to the US Dollar and the Euro negatively affected the proﬁ ts of the Southern African business by not only reducing Rand revenues from exports but also domestic prices as a result of increased competition from imports. continues on page 43 2010 annual report 43 Section 2 The operating margin (operating proﬁ t excluding special items to sales) of each of our businesses is set out below: Percentage Europe North America Southern Africa Sappi group 2010 2009 2008 2.1 9.0 8.6 5.2 0.4 – 1.4 0.6 2.0 5.7 14.1 6.2 To achieve our goal of at least a 12% ROCE we need to improve the group operating margin to around 8% per annum. We expect margins, particularly in Europe and Southern Africa, to improve in 2011. The bar chart below shows the main components of the “bridge” between our 2009 operating proﬁ t excluding special items compared to 2010. continues on page 44 44 Chief ﬁ nancial ofﬁ cer’s report continued Sappi group review continued Section 2 Special items Special items are those items which management believe are material by nature or amount to the operating results and require separate disclosure. Such items generally include proﬁ t and loss on disposal of property, investments and businesses; asset impairments; restructuring charges; non-recurring integration costs related to acquisitions; ﬁ nancial impacts of natural disasters; non-cash gains or losses on the price fair value adjustment of plantations; and unusual government subsidies such as the alternative fuel mixture credits paid to qualifying alternative fuel producers in the USA. Special Items US$ million Plantation price fair value gain (charge) Fixed asset impairment reversals (impairments) Restructuring provisions and closure costs US alternative fuel mixture credits Broad-based Black Economic Empowerment transaction costs Fire and ﬂ ood damage Other costs 2010 2009 31 20 (46) 51 (23) (26) (5) 2 (67) (79) (34) 87 - (11) (2) (106) The net impact of Special items improved our operating proﬁ t in 2010 marginally by US$2 million. In 2009, the negative impact of US$106 million was substantial. We explain the major components of the 2010 special items below:  the favourable non-cash US$31 million plantation price fair value adjustment was largely due to higher timber prices partly offset by increases in delivery costs – notes 2.3.6 and 10 to the group annual ﬁ nancial statements give a full explanation about the accounting for our plantations;  the restructuring provisions and closure costs of US$46 million related to the closure of the Kangas Mill in Finland and the Usutu Pulp Mill in Swaziland, both of which ceased operations in January 2010;  we earned a further, and ﬁ nal, US$51 million of alternative fuel mixture credits in the United States of America – please refer to note 2.2.14 of our group annual ﬁ nancial statements for further information about these tax credits;  we recognised a substantial US$23 million non-cash charge in accordance with IFRS2 in connection with our Broad-based Black Economic Empowerment transaction which was approved by our shareholders and completed in 2010 – further information on this transaction is disclosed in notes 2.2.10, 17 and 28 to our group annual ﬁ nancial statements;  our Stockstadt Mill in Germany suffered a major electrical ﬁ re in December 2009 costing an estimated US$30 million. Since we self-insure up to US$25 million per incident (with an aggregate loss limit of US$40 million per annum), most of the property damage and business interruption cost of this ﬁ re will be covered by the group. The exact amount of this cost will be determined once the claim is ﬁ nalised. continues on page 45 2010 annual report 45 Operating profi t After taking into account special items, our operating proﬁ t for 2010 and 2009 was as follows: Section 2 US$ million Operating proﬁ t excluding special items Special Items Operating proﬁ t Key operating targets 2010 2009 339 2 341 33 (106) (73) Our ﬁ nancial targets and our performance against these targets are set out and discussed on page 6 of the annual report. Our key operating target is for operating proﬁ t excluding special items to exceed 12% of capital employed (ROCE). This target has been derived to meet the group’s weighted average cost of capital after adjusting book assets for inﬂ ation. Our performance against this target for 2010 was 8% – we would hope to get considerably closer to the target in 2011. In order to meet our ROCE target, we need to improve operating proﬁ t excluding special items to around US$500 million, at our current level of capital employed. Major sensitivities Some of the more important factors which impact the group’s operating proﬁ t excluding special items, based on current anticipated revenue and cost levels, are summarised in the table below: Sensitivities Net selling prices Variable costs Sales volume Fixed costs Brent crude oil price Pulp prices Wood prices ZAR/US Euro/US$ SFPE SFPNA SA Group Change EUR million US$ million ZAR million US$ million 1% 1% 1% 1% US$1 US$10 1% 10 cents 10 cents 27 18 9 7 4 (9) 2 – – 13 132 7 5 5 – 2 2 – 3 66 54 47 7 42 5 64 – 62 38 23 19 6 (4) 5 8 3 The table above shows that operating proﬁ t excluding special items is most sensitive to changes in the selling prices of our products. The calculation of the impact of these sensitivities on operating proﬁ t excluding special items assumes all other factors remain the same and does not take into account potential management interventions to mitigate negative impacts or enhance beneﬁ ts. As the table shows, the impact on the individual businesses of one sensitivity may be different as is the case with changes in international pulp prices which affects the Southern African and North American businesses (which are net sellers of pulp) and the European business (which is a net purchaser of pulp) in opposite ways. continues on page 46 46 Chief ﬁ nancial ofﬁ cer’s report continued Sappi group review continued Section 2 Finance costs Comparing our net ﬁ nance costs year-on-year is complex. The breakdown of the major components of our net ﬁ nance costs in the table below will be helpful in understanding the comparison and the make-up of our ﬁ nance costs. US$ million Net interest Foreign exchange gains Fair value change in ﬁ nancial instruments Net ﬁ nance costs 2010 2009 293 (17) (21) 255 137 (17) 25 145 Net interest increased signiﬁ cantly from US$137 million in 2009 to US$293 million in 2010. Eliminating once-off discounts received on early settlement of debt in 2009 and 2010, net interest paid can be re-stated on a “normalised” basis as follows: US$ million Net interest Discounts on early re-purchase of debt Normalised net interest 2010 2009 293 5 298 137 41 178 On this normalised basis, net interest has increased by some US$120 million compared to 2009. The main reasons for this increase are:  in the last month of ﬁ scal 2009, we re-ﬁ nanced US$1.3 billion of maturing low cost debt (costing on average 4.6% per annum) – which was raised at a time when our credit rating was “investment” grade and ﬁ nancial markets were more favourable – with new debt at an average rate of approximately 9,7% per annum – this increased our ﬁ nance costs by some US$65 million;  the US$27 million non-cash amortisation of discounts and costs relating to the 2009 re-ﬁ nancing;  the higher interest rate cost on approximately US$850 million of ﬁ xed rate debt which, for most of 2009, was swapped into lower ﬂ oating rates – these swaps were unwound in 2009 resulting in a cash inﬂ ow of US$50 million;  in the past two years we have held above average cash balances, serving as a liquidity buffer during the ﬁ nancial crisis and the uncertain economic outlook prevailing since then – the average balances held on deposit in 2010 exceeded those in 2009 but, as the average short-term interest rates were lower than during our 2010 ﬁ nancial year, the interest earned on our cash deposits was lower in 2010 compared to 2009. The foreign exchange gains of US$17 million in both 2010 and 2009, arose largely from forward points earned on Rand/US Dollar forward exchange contracts taken out to cover US Dollar denominated exports from the Southern African business. The fair value adjustments to ﬁ nancial instruments relate mainly to the unwinding of ﬁ xed to variable interest rate swaps in 2009. The accounting convention required us to take a charge of US$20 million in 2009 (on the swaps), but this was off-set in 2010 by the amortisation gain on writing down part of the underlying debt to fair value amounting to US$21 million. Further amortisation gains in 2011 and 2012 will total approximately US$24 million. continues on page 47 2010 annual report 47 Taxation Our tax charge for the year was US$20 million, resulting in an effective tax rate for the group of 23%. The regional contributions to the charge are set out in the table below: Section 2 US$ million Europe North America Southern Africa Sappi group Proﬁ t/(loss) before tax Tax (charge) relief Effective tax rate (150) 159 77 86 6 (6) (20) (20) (4)% 4% 26% 23% In Europe, despite the US$150 million loss before tax, we only took tax relief on these losses in an amount of US$6 million because, in our judgement, in certain countries in Europe we may not generate sufﬁ cient pre-tax proﬁ ts to recover these losses in the near future. We also have substantial additional unrecognised tax losses in Austria, Finland, Belgium and The Netherlands which will substantially shield future proﬁ ts earned in those countries. The low charge in North America relates mainly to taxes paid in certain of the States in which we operate. At the Federal level we have substantial unrecognised tax losses which, in 2010, largely shielded the proﬁ ts of our North American business and are expected to continue to shield proﬁ ts there for some years to come. The effective tax rate of 26% in Southern Africa is lower than the Southern African statutory rate of 28%. On one hand, no tax relief is available on the Broad-based Black Economic Empowerment transaction (referred to under special items above) and on the closure costs related to the Usutu Pulp Mill (referred to under special items above). On the other hand, proﬁ ts on exports beneﬁ ted from lower taxes in certain countries. Net profi t, earnings per share and dividends We were pleased to again return to proﬁ t at the net level. After taking into account ﬁ nance costs and taxation, our net proﬁ t and earnings per share for 2010 and 2009 were as follows: US$ million Operating proﬁ t (loss) Net ﬁ nance costs Proﬁ t (loss) before tax Taxation (charge) relief Net proﬁ t (loss) Average number of shares in issue (million) Earnings (loss) per share (US cents) 2010 341 (255) 86 (20) 66 517 13 2009 (73) (145) (218) 41 (177) 483 (37) Our board decided that it would not be appropriate to declare a dividend for ﬁ scal 2010. continues on page 48 48 Chief ﬁ nancial ofﬁ cer’s report continued Sappi group review continued Section 3 Cash ﬂ ow analysis In the table below we present the group’s cash ﬂ ow statement in a summarised format: US$ million Operating proﬁ t (loss) Depreciation Fellings Contributions to post-employment beneﬁ ts Other non-cash items Cash generated by operations Movements in working capital Cash generated by operating activities Finance costs Taxation Capital expenditure* Dividends paid Proceeds on disposal of ﬁ xed assets Net cash generated * Excluding the M-real acquisition in ﬁ scal 2009. 2010 2009 341 411 71 (73) (13) 737 (5) 732 (194) (9) (211) – 23 341 (73) 396 69 (62) 102 432 152 584 (81) (5) (176) (37) 4 289 Cash generated by operations of US$737 million was a substantial improvement over the US$432 million generated in 2009. This improvement was mainly due to the higher operating proﬁ t excluding special items in 2010. The small working capital increase of US$5 million was impressive given the large increase in business activity compared to 2009. All our regions managed their working capital very well – this is further discussed in section 4 of this report. In line with our determination to reduce net debt, capital expenditure was again kept at a relatively low level and aimed mainly at maintaining our production facilities. We spent US$173 million on maintenance, US$9 million on acquiring plantations and US$29 million on expanding and improving our production assets. Net cash generated was a healthy US$341 million which went to reduce net debt – please see section 4 for the movement in our net debt. continues on page 49 2010 annual report 49 Balance sheets Our group balance sheets can be summarised as follows: Section 4 US$ million Property, plant and equipment Plantations Net working capital Other assets Net post employment liabilities Other liabilities Employment of capital Equity Net debt Capital employed 2010 3,660 687 453 321 5,121 (446) (558) 4,117 1,896 2,221 4,117 2009 3,934 611 534 332 5,411 (435) (606) 4,370 1,794 2,576 4,370 We discuss the more important components below. Property, plant and equipment We have 19 mills in eight countries capable of producing 4.1 million tons of pulp and 6.6 million tons of paper products. For more information on our mills, their production capacities and products, please refer to page 23, for our Fine Paper mills and page 27 for Sappi Southern African mills. The cost, depreciation and impairments related to our property, plant and equipment are set out in the table below: US$ million Cost Accumulated depreciation and impairments Net book value 2010 2009 10,111 6,451 3,660 10,344 6,410 3,934 During 2010, we depreciated our ﬁ xed assets by a further US$411 million, booked additions of US$206 million and reversed previous impairments of US$20 million. Currency translation difference was a negative US$86 million. The capacity replacement value of the property, plant and equipment for insurance purposes has been assessed at approximately US$25 billion. For more information on property, plant and equipment – please see note 9 to our ﬁ nancial statements. Plantations We own plantations in Southern Africa on approximately 385,000 hectares of plantable and have access to a further approximately 170,000 hectares of land leased by us or available to us under contract. We regard our plantations as a vital strategic resource of low cost ﬁ bre to feed our pulp production in southern Africa and we intend to invest further in this resource in the future. Our plantations currently provide approximately 70% of the wood requirements of our Southern African Mills. In 2010 we, as a group, purchased an additional US$706 million of wood to feed our pulp mills, mainly in Europe and North America. In terms of the relevant accounting standard, we are required to carry these plantations on our balance sheet at their fair value less the estimated cost of cutting, delivering and selling the timber at the harvesting stage. In notes 2.3.6 and 10 to the group annual ﬁ nancial statements, we present considerable detail about how we account for our plantations. continues on page 50 50 Chief ﬁ nancial ofﬁ cer’s report continued Sappi group review continued Section 4 Working capital The component parts of our working capital at ﬁ nancial year end for the past two years are shown in the table below: US$ million Inventories Receivables Payables Net working capital 2010 836 888 2009 792 858 (1,271) (1,116) 453 534 Optimising the levels of our working capital to minimise the cost of funding this element of our business is a key focus area. We carefully manage the ratio of working capital to sales and regularly compare this ratio to those of our peers in the industry and believe that our working capital management compares favourably in that regard. Managing the average level of net working capital is a large element of the management incentive scheme for all our businesses. The quarterly average net working capital in 2010 was US$575 million compared to US$634 million in 2009, a decrease of 9% year-on-year. Sales increased by 22% in 2010. The decrease in average net working capital despite the substantial increase in sales, indicates that working capital was well managed in 2010. Post-employment liabilities The group operates various deﬁ ned beneﬁ t pension, post retirement medical and other types of funds in the various countries in which we operate. The deﬁ ned beneﬁ t liabilities can be summarised as follows: US$ million Liabilities of funded deﬁ ned beneﬁ t plans Assets of funded deﬁ ned beneﬁ t plans Net deﬁ cit on funded plans Liabilities of unfunded plans Net balance sheet liability Cash contributions to deﬁ ned beneﬁ t plans Income statement charge for deﬁ ned beneﬁ t plans 2010 2009 (1,928) 1,808 (1,765) 1,695 (120) (326) (446) 77 29 (70) (365) (435) 64 31 We carry a net liability of US$446 million in respect of our deﬁ ned beneﬁ t obligations. Of the US$77 million of cash contributions to deﬁ ned beneﬁ t schemes in 2010, US$26 million (US$25 million in 2009) was by way of “catch-up” contributions towards the deﬁ cits in our funded plans. We expect to make similar additional contributions towards these deﬁ cits next year. continues on page 51 2010 annual report 51 Equity Year-on-year, equity increased by US$102 million to US$1,896 million as detailed below: Section 4 US$ million Equity at September 2009 Proﬁ t for the year Actuarial losses on pension funds Exchange rate differences on translation of non-dollar operations Shares issued in connection with the Broad-based Black Economic Empowerment transaction Movement in hedging reserves Share-based payments Other Equity at September 2010 2010 1,794 66 (71) 52 20 14 17 4 1,896 More detail on the movement in equity can be found in the statement of changes in equity in our group annual ﬁ nancial statements. Debt Debt is a major source of funding for the group. In the management of debt we focus on net debt, which is the sum of current and non-current interest-bearing borrowings and bank overdraft, net of cash and cash equivalents. Structure of net debt and liquidity The structure of our net debt as at end September 2010 and 2009 is summarised below: Structure of net debt US$ million Long-term debt Secured debt Unsecured debt Less short-term portion Net short-term debt Securitisation funding Overdrafts Short-term portion of long-term debt Less cash Net debt 2010 2,317 1,208 1,353 (244) (96) 447 5 244 (792) 2009 2,726 1,520 1,407 (201) (150) 400 19 201 (770) 2,221 2,576 In 2010, we used cash resources to early repay US$240 million of long-term debt. After these early repayments and US$75 million of other scheduled debt repayments, our liquidity position remains very strong with our cash holdings exceeding short-term debt by US$96 million. This is more so because our securitised borrowings of US$447 million which, although classiﬁ ed as short-term debt, roll forward monthly and are not expected to be repayable in the short-term. In addition, our committed Revolving Credit Facility of EUR209 million (US$282 million) remains unutilised. continues on page 52 52 Chief ﬁ nancial ofﬁ cer’s report continued Sappi group review continued Section 4 Movement in net debt The movement in net debt from September 2009 to 2010 is explained in the table below: US$ million Net debt at September 2009 Net cash generated in 2010 Fair value adjustment Currency translation Net debt at September 2010 Debt proﬁ le and maturity 2010 2,576 (341) (7) (7) 2,221 We show the major components and maturities of our net debt as at end September 2010 below. These are split between debt raised in South Africa and debt raised outside of South Africa. US$ millions Amount Local int rate weighted Fixed/ variable Short- term 2011 2012 2013 2014 There- after Maturity (Sappi ﬁ scal years) South Africa Bank debt Bonds Gross debt less cash Net SA debt Non-South African Securitisation OeKB Loan(1) Other bank debt 181 356 10.22% 10.42% Fixed Fixed – – 537 (129) 408 (129) (129) 447 432 171 2.81% Variable 447* 8.60% Fixed – 4.26% Variable 122* Revolving credit facility(1) 0 2.03%# Variable 6.75% 12.00% 11.75% 7.50% Fixed Fixed Fixed Fixed 2012 Bonds (US$) 2014 Bonds (US$)(1) 2014 Bonds (EUR)(1) 2032 Bonds (US$) IFRS adjustments Gross debt less cash Net non-SA debt Net group debt 500 300 472 221 (67) 2,476 (663) 1,813 2,221 – – – – – (663) (94) 68 – – 68 – 62 24 – – – – – – 86 14 213 63 142 – – 227 205 – 124 22 – 500 – – – – – 124 1 – – – – – – 646 873 125 330 29 – – 29 – 122 2 – – 300 472 – – 896 925 8 – – 8 – – – – – – – 221 – 221 229 (223) 154 * Securitisation debt and US$122 million of the other bank debt is expected to roll over. # Commitment fees payable on undrawn amounts of the facility of EUR209 million. (1) These debt components are secured by a security package consisting of claims over certain of our non-South African ﬁ xed assets, inventories in North America and cross guarantees from, and the pledge of shares by, our major non-South African subsidiaries. The majority of our non-South African long-term debt is guaranteed by Sappi Limited, the group holding company. continues on page 53 2010 annual report 53 Covenants Non-South African covenants Section 4 Financial covenants apply to approximately US$430 million of our non-South African bank debt, the EUR209 million Revolving Credit Facility and our securitised borrowings. These ﬁ nancial covenants are calculated on a last-four-quarter basis and require that at the end of each quarter:  the ratio of group net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) be not greater than 5:1 at the end of September 2010, reducing over the term of the facility to 4:1 by September 2012; and  the ratio of group EBITDA to net interest expense be not less than 2:1 at the end of September 2010, increasing over the term of the facility to 2.5:1 by June 2012. The table below shows that as at September 2010 we were in compliance of these covenants: Non-South African covenants Net debt to EBITDA EBITDA to net interest 2010 Covenant 2.7 2.99 <5.0 >2.0 In addition to the ﬁ nancial covenants referred to above, our 2014 Bonds and certain of our bank facilities contain customary afﬁ rmative and negative covenants restricting, among other things, the granting of security, incurrence of debt, the provision of loans and guarantees, mergers and disposals and certain restricted payments, including the payment of dividends. As regards dividend payments, the group is restricted from paying cash dividends in certain circumstances, for example if the net debt to EBITDA ratio exceeds 4:1 or if the EBITDA to net interest is less than 2:1. In addition, any cash dividends paid may not exceed 50% of net proﬁ t excluding special items. South African covenants Separate covenants also apply to certain of the debt of our Southern African business. These covenants require that, with regard to Sappi Southern Africa (Pty) Limited and its subsidiaries:  the ratio of net debt to equity is not at the end of any quarter greater than 65%; and  at the year-end, the ratio of EBITDA to net interest paid for the year is not less than 3:1. Below we show that for the year ended September 2010, the South African ﬁ nancial covenants were comfortably met: South African covenants Net debt to equity EBITDA to net interest 2010 Covenant 37% 4.2 <65% >3.0 continues on page 54 54 Chief ﬁ nancial ofﬁ cer’s report continued Sappi group review continued Section 5 Credit rating At the date of this annual report, our credit ratings were as follows: Fitch South African national rating Sappi Southern Africa (Pty) Limited A/F1/Stable (March 2010) Moody’s international rating Sappi Corporate Credit Rating Ba3/NP/Stable (September 2009) Secured Debt Rating Unsecured Debt Rating Ba2 (September 2009) B2 (September 2009) Standard & Poor’s international rating Corporate Credit Rating Secured Debt Rating Unsecured Debt Rating BB-/B/Stable (September 2009) BB (September 2009) B+ (September 2009) The ratings by Moody’s and Standard & Poor’s were updated in September 2009 in the context of the reﬁ nancing transactions that were ﬁ nalised in August 2009, including the new US$300 million and EUR350 million bonds, the renewal of the EUR209 Revolving Credit Facility and the extension of the EUR400 million OeKB syndicated bank facility. These ratings were conﬁ rmed in updated reports as published in August 2010 by both rating agencies. Fitch updated the Sappi Southern Africa (Pty) Ltd rating in March 2010 and changed the outlook from negative to stable in response to more favourable market conditions and performance. continues on page 55 2010 annual report 55 Share listing and share performance The group’s primary listing is on the JSE Limited, South Africa’s stock exchange, and has a secondary Section 6 listing on the New York Stock Exchange. Information regarding our shares, share price, the value of shares traded, main shareholders and other related information is contained on pages 58 and 59 of the group annual ﬁ nancial statements. Our share price performance, adjusted for the new shares issued in the ﬁ rst quarter of ﬁ scal 2009 when we issued 287 million shares in terms of the rights offer and 11 million shares to M-real in part payment for the acquisition of its coated paper business, is shown in the graph below: * Historic share prices revised to reﬂ ect rights offer. Conclusion Overall our operating performance in 2010 was much improved but still well short of the levels we believe the group is capable of performing at. Our North American business did very well to earn operating proﬁ t excluding special items of US$124 million. We expect better operating results, particularly from the European and southern African regions in 2011, and our results in the last quarter of ﬁ scal 2010 give cause for optimism in that regard. We were pleased with the US$341 million of net cash we generated in 2010 and expect to generate substantial cash next year and to make good progress towards achieving our goal to reduce net debt to below US$2.0 billion. M R Thompson Chief ﬁ nancial ofﬁ cer 03 December 2010 56 Five-year review for the year ended September 2010 US$ million Income statement Sales Operating proﬁ t excluding special items Special items – (gains) losses Operating proﬁ t (loss) Net ﬁ nance costs Proﬁ t (loss) before taxation Taxation charge (beneﬁ t) Proﬁ t (loss) for the year Balance sheet Total assets Non-current assets Current assets Current liabilities Shareholders’ equity Net debt Gross interest-bearing debt Cash Capital employed Cash ﬂ ow Cash generated from operations Decrease (increase) in working capital Finance costs paid Finance revenue received Taxation paid Dividends paid Cash retained from operating activities Net cash generated (utilised) excluding Acquisitions Cash effects of ﬁ nancing activities Capital expenditure (gross) EBITDA excluding special items September 2010 September 2009 September 2008 September 2007 September 2006 6,572 5,369 5,863 5,304 4,941 339 (2) 341 255 86 20 66 7,184 4,653 2,531 2,039 1,896 2,221 3,013 792 4,117 737 (5) (206) 12 (9) – 529 341 (257) 211 752 33 106 (73) 145 (218) (41) (177) 7,297 4,867 2,430 1,841 1,794 2,576 3,346 770 4,370 432 152 (107) 26 (5) (37) 461 289 707 175 431 366 52 314 126 188 86 102 6,109 4,408 1,701 1,926 1,605 2,405 2,679 274 4,010 623 1 (139) 13 (70) (73) 355 (139) 49 505 740 313 (70) 383 134 249 47 202 6,344 4,608 1,736 1,916 1,816 2,257 2,621 364 4,073 585 60 (183) 21 (27) (68) 388 24 98 458 688 91 (34) 125 130 (5) (1) (4) 5,517 3,997 1,520 1,666 1,386 2,113 2,337 224 3,499 396 (17) (164) 26 (13) (68) 160 (127) (21) 303 483 2010 annual report 57 US$ million Statistics Number of ordinary shares (millions) In issue at year-end(1) Basic weighted average number of shares in issue September 2010 September 2009 September 2008 September 2007 September 2006 519.5 515.7 229.2 228.5 227.0 during the year(1,3) 516.7 482.6 362.2 360.6 358.0 Per share information (US cents per share) Basic earnings (loss)(3) Diluted earnings (loss)(3) Headline earnings (loss)(3) Diluted headline earnings (loss)(3) Ordinary dividend declared(2) Net asset value Proﬁ tability ratios (%) Operating proﬁ t (loss) to sales Operating proﬁ t excluding special items to sales EBITDA excluding special items to sales Operating proﬁ t excluding special items to capital employed (ROCE) Proﬁ t (loss) to average ordinary shareholders’ equity (ROE) Debt ratios (%) Net debt to total capitalisation Efﬁ ciency ratios Asset turnover (times) Inventory turnover ratio Liquidity ratios Current asset ratio Trade accounts receivable days outstanding (including receivables securitised) Cash interest cover (times) Number of employees Exchange rates 13 13 10 10 – 365 5.2 5.2 11.4 8.0 3.6 (37) (37) (21) (21) – 348 (1.4) 0.6 8.0 0.8 (10.4) 28 28 60 59 16 700 5.4 6.2 12.6 9.1 6.0 56 55 52 51 32 795 7.2 5.9 13.0 8.3 12.6 (1) (1) (7) (7) 30 611 2.5 1.8 9.8 2.6 (0.3) 53.9 58.9 60.0 55.4 60.4 0.9 6.9 1.2 54 2.5 0.7 6.3 1.3 58 3.2 1.0 6.9 0.9 48 4.4 0.8 6.4 0.9 49 3.8 0.9 6.3 0.9 44 2.9 15,586 16,427 15,156 15,081 15,200 US$ per one Euro exchange rate – closing US$ per one Euro exchange rate – average (12 month) ZAR to one US$ exchange rate – closing ZAR to one US$ exchange rate – average (12 month) 1.3491 1.3658 7.0190 7.4917 1.4688 1.3657 7.4112 9.0135 1.4615 1.5064 8.0751 7.4294 1.4272 1.3336 6.8713 7.1741 1.2672 1.2315 7.7738 6.6039 Deﬁ nitions for various terms and ratios used above are included in the Glossary on pages 189 to 191. (1) Net of treasury shares (refer to note 17). (2) The dividends for all the ﬁ nancial years were declared subsequent to year end. (3) The years ending September 2006 to September 2008 have been restated for the bonus element of the rights issue (refer to note 7). 58 Share statistics at September 2010 Shareholding – ordinary shares in issue 1 – 5 000 5 001 – 10 000 10 001 – 50 000 50 001 – 100 000 100 001 – 1 000 000 Over 1 000 000 Shareholder spread – Type of shareholder Non-public Group directors Number of shareholders 5,585 210 322 137 352 81 Number of shares* % of shares in issue 3,557,888 1,545,862 7,691,532 10,121,098 115,572,140 381,022,584 0.7 0.3 1.5 1.9 22.2 73.4 % 83.6 3.1 4.8 2.0 5.3 1.2 6,687 100.0 519,511,104 100.0 % of shares in issue 0.02 0.02 – – – – 99.98 100.00 Associates of group directors Trustees of the company’s share and retirement funding schemes Shareowners who, by virtue of any agreement, have the right to nominate board members Shareowners interested in 10% or more of the issued shares Public (The number of public shareholders as at September 2010 was 6,681 ) *The number of shares excludes 21,935,119 treasury shares held by the group. Sappi has a primary listing on the JSE Limited and a secondary listing on the New York Stock Exchange. A large number of shares are held by nominee companies for beneﬁ cial shareholders. Pursuant to Section 140A of the South African Companies Act, 1973, as amended, the directors have investigated the beneﬁ cial ownership of shares in Sappi Limited, including those which are registered in the nominee holdings. These investigations revealed as of September 2010 the following beneﬁ cial holder of more than 5% of the issued share capital of Sappi Limited: Public Investment Commissioner (SA) Shares 61,609,689 % 11.9 Further, as a result of these investigations, the directors have ascertained that some of the shares registered in the names of the nominee holders are managed by various fund managers and that, as of September 2010, the following fund managers were responsible for managing 5% or more of the share capital of Sappi Limited: Allan Gray Limited Investec Asset Management Capital Group Companies Inc. Old Mutual Investment Group South Africa Shares 116,798,521 66,968,541 43,837,075 40,244,164 % 22.5 12.9 8.4 7.7 2010 annual report 59 Share statistics Ordinary shares in issue (millions)** Net asset value per share (US cents) Number of shares traded (millions) JSE New York Value of shares traded JSE (ZAR million) New York (US$ million) Percentage of issued shares traded Market price per share – year end JSE (South African cents) New York (US$) – highest JSE (South African cents) New York (US$) – lowest JSE (South African cents) New York (US$) Earnings yield (%)* Dividend yield (%)* Price/earnings ratio (times)* Total market capitalisation (US$ million)* September 2010 September 2009 September 2008 September 2007 September 2006 519.5 365 467.00 11.27 515.7 348 443.40 66.28 229.2 700 241.58 51.04 228.5 795 246.95 49.81 227.0 611 252.60 57.60 14,859.9 12,989.4 22,623.4 27,983.7 20,946.0 46.4 92.1 3,565 5.14 3,792 5.14 2,539 3.27 2 – 50 2,639 259.1 98.8 2,855 3.76 5,403 6.41 1,290 1.24 negative – negative 1,985 634.3 127.7 5,054 6.32 7,661 9.98 4,700 5.72 9.58 2.56 10.43 1,435 770.8 129.9 6,602 9.67 8,824 12.24 6,263 7.88 5.41 3.33 18.48 2,196 715.0 136.7 6,336 8.04 6,389 9.62 3,948 5.98 negative 3.68 negative 1,850 * Based on ﬁ nancial year end closing prices on the JSE Limited. Income statement amounts have been converted at average year-to-date exchange rates. ** The number of shares excludes 21,935,119 treasury shares held by the group. Note: Deﬁ nitions for various terms and ratios used above are included in the Glossary on pages 189 to 191. 60 2010 annual report 61 Risk management This table provides the latest review of the signiﬁ cant exposures Sappi faces as it goes forward. The Sappi group risk proﬁ le is reviewed at least twice annually to give management risk management information to enable them to make informed risk-based decisions. The risks are ranked according to management’s assessment of the likelihood of the occurrence and severity. These risks are further discussed in Sappi’s annual report on Form 20-F ﬁ led with the US Securities Exchange which is available on our website www.sappi.com or in hard copy on request. Top risks Risk 1. We operate in a cyclical indus try. Global economic conditions may cause substantial ﬂ uctu ations in our results 2. The markets for pulp and paper products are highly competitive Risk description and mitigation Our pulp and paper products are signiﬁ cantly affected by cyclical changes in industry capacity and output levels and by changes in the world economy. As a result of periodic supply and demand imbalances in the pulp and paper industry, these markets historically have been cyclical, with volatile pulp and paper prices. In addition, turmoil in the world economy in 2009 led to sharp reductions in volume and pressure on prices in many of our markets and we acted rapidly to match our output to demand by curtailing production for extended periods and ceasing operations at Muskegon Mill and Kangas Mill. We took actions to improve efﬁ ciencies and reduce costs in all aspects of our business. We continue to maintain a high level of economic pulp integration on a group-wide basis which reduces the impact of pulp price ﬂ uctuations on our results. We will continue to match our output to market demand. There has been a recent trend towards consolidation in the pulp and paper industry creating larger, more focused companies. We have expanded Saiccor Mill to strengthen our leading position in the chemical cellulose market and our acquisition of M-real’s coated graphic paper business in 2009 enhanced our position in the woodfree coated paper market. We also continue to drive good customer service, innovation and efﬁ cient manufacturing and logistics. We are focused on improving the performance and competitiveness of our European business in particular of coated mechanical paper. We are also taking steps to improve the performance of our Southern African paper and paper packaging business. 3. We require signiﬁ cant amounts of ﬁ nance to fund our business and our ability to generate cash or borrow depend on many factors some of which are beyond our control Our ability to fund our working capital, capital expenditure, research and development requirements and to make payments on our debt principally depends on cash available from our credit facilities, other debt arrangements and our operating performance. Our year end cash balance provides us with adequate headroom to fund our short-term requirements. We are also focusing on proﬁ t improvement in our operations by reducing ﬁ xed and variable costs, spending capital prudently and tightly controlled working capital. 4. Fluctuations in the value of currencies, particularly the Rand and the Euro, in relation to the US Dollar, have in the past had and could in the future have a signiﬁ cant impact on our earnings in these currencies 5. The inability to obtain energy or raw materials at favourable prices could adversely affect our operations 6. The cost of complying with environmental, health and safety laws may be signiﬁ cant to our business Sappi is exposed to economic, transaction and translation currency risks. The objective of the group in managing transactional currency risks is to ensure that foreign exchange exposures are identiﬁ ed as early as possible and actively managed. In managing transactional currency risks, the group ﬁ rst makes use of internal hedging techniques, with external hedging being applied thereafter. External hedging techniques consist primarily of foreign forward exchange contracts and currency options. Foreign currency capital expenditure on projects is covered as soon as practical (subject to regulatory approval). We require substantial amounts of wood, chemicals and energy for our production activities. The prices for and availability of these energy supplies and raw materials may be subject to change or curtailment. To mitigate the risk, we are improving procurement methods, ﬁ nding alternative lower-cost fuels and raw materials, further minimising waste, improving manufacturing and logistics efﬁ ciencies and implementing energy reduction initiatives. We are subject to a wide range of environmental, health and safety laws and regulations in the various jurisdictions in which we operate. We invest to maintain compliance with applicable laws and co-operate across regions to apply best practices in a sustainable manner. The principles of ISO 14000, Forest Stewardship Council and other recognised programmes are well entrenched across the group. We have also made signiﬁ cant investments in operational and maintenance activities related to reductions in air emissions, wastewater discharges and waste generation. We closely monitor the potential for changes in pollution control laws, including GHG emissions requirements, and take action with respect to our operations accordingly. The health and safety of our own employees and contractors remain a top priority. 62 Risk management continued Risk philosophy The Group Risk Management team was mandated by the Sappi events. In line with previous years, the board decided not to take separate cover for losses from acts of terrorism, which is consistent Limited board to establish, coordinate and drive the Risk Management with current practice in the paper manufacturing industry. Sappi process throughout Sappi. It has established a risk management places the insurance for its plantations on a stand-alone basis into system to identify and manage signiﬁ cant risks. Complete risk assessments are conducted at least annually in our divisions (including Sappi Trading) and for the group, and are international insurance markets. The impact of widespread ﬁ res on our plantations this year was substantially less than in the previous three years. updated every six months. The process uses our strategy as the Sappi has a global insurance structure and the bulk of its insurance base against which to assess risk scenarios. The scope of the risk is placed with its own captive insurance company in Stockholm, assessment includes risks that may lead to a signiﬁ cant cost, Sweden; Sappisure Försäkrings AB, which in turn reinsures those liability or loss, including loss of opportunity, or may affect the risks outside the company’s self-insurance capabilities in the global current strategic plan. These risks are identiﬁ ed and analysed, and reinsurance markets. risk responses to each individual risk are designed, planned, implemented and monitored. Insurance Sappi follows a practice of insuring its assets against loss arising from catastrophic events. These events include ﬁ re, ﬂ ood, explosion, earthquake and machinery breakdown. Speciﬁ c environmental risks are also insured. External risk engineers conduct both under- writing surveys as well as risk control surveys of all the Sappi facilities. The risk control surveys report, rate and rank the identiﬁ ed Sappi has negotiated the renewal of its 2010 insurance cover at rates similar to those of 2009. Self-insured retention for any one property damage occurrence has remained at US$25 million, as has the annual aggregate of US$40 million. For property damage and business interruption insurance, cost-effective cover to full value is not readily available. However, the directors believe that the loss limit cover of US$1 billion should be adequate for what they have determined as the reasonable foreseeable loss for any single claim. risks and make recommendations to address the probability and/ Insurance cover for credit risks currently applies on a regional basis or severity of these risks. This process is focussed primarily on the to a portion of Sappi’s North American, European and Southern risk exposures associated with insurable risks. Insurance also African domestic trade receivables subject to a US$5 million group covers business interruption events which may result from these aggregate ﬁ rst loss. 2010 annual report 63 Corporate Governance We are committed to high standards of corporate governance and continue to seek areas of improvement by measuring ourselves The board of directors The basis for good governance at Sappi is laid out in the charter against international best practice. The group endorses the for the board of directors, which sets out the division of Corporate Governance code contained in the South African King III responsibilities between the board and executive management. Report issued in 2009, and applies the principles incorporated The board collectively determine major policies and strategies and therein or is developing and implementing governance processes are responsible for managing risk. For further information about in line with the recommendations. We make use of independent the board and the board charter, please refer to the company assessment tools to give us conﬁ rmation of the extent to which we website, (www.sappi.com). The composition of the board and apply the principles of King III. The group maintains its primary the attendance at board meetings and board committee meetings listing on the JSE Limited as well as a listing on the New York are set out in the following table: Stock Exchange. The group complies in all material aspects with the regulations and codes of these exchanges as they apply to Sappi. The group delisted from the London Stock Exchange, effective 2 November 2009. Name Status Board Audit Board committees Nomination and Governance Compen- sation Human resources and trans- formation Sustainability R J Boëttger Chief Executive Ofﬁ cer M R Thompson Chief Financial Ofﬁ cer D C Cronjé Independent non-executive, chairman D C Brink(1) Senior independent non-executive M Feldberg(2) Lead independent director J E Healey D Konar(4)(6) Independent non-executive Independent non-executive H C Mamsch Independent non-executive J D McKenzie Independent non-executive K R Osar B Radebe Independent non-executive Independent non-executive A N R Rudd Independent non-executive F A Sonn(1) Independent non-executive N P Mageza(3)(5) Independent non-executive R Thummer(3) Non-executive M V Moosa(3) Non-executive 5/5 5/5 5/5 1/1 5/5 5/5 B B E   5/5 C   3/5 5/5 5/5 5/5 5/5 1/1 4/4 3/3 1/1 B 3/3 6/7 7/7 5/7 C 3/3 B E C   2/2 C 2/2 5/5 B 2/2  2/2 5/5 C 2/2 2/2 5/5   2/2 1/1   3/5 5/5 C 2/2  3/3  4/5  2/2 3/3 7/7 7/7 6/7 6/7  3/3  1/1  2/2 1) Retired from the board on 31 December 2009. 2) Professor M Feldberg became the lead independent director from 6 May 2010. 3) During the year, Mr N P Mageza, Dr R Thummer and Mr V Moosa were appointed to the board with effect from 1 January 2010, 1 February 2010 and 1 August 2010 respectively. 4) Member of the human resources and transformation committee until February 2010. 5) Appointed as a member of the human resources and transformation committee, with effect from February 2010. 6) Appointed as a member of the nomination and governance committee, with effect from February 2010.  Indicates board committee membership, C indicates board committee chairman, B indicates attendance by invitation and E indicates attendance ex ofﬁ cio. The ﬁ gures in each column indicate the number of meetings attended out of the maximum possible number of meetings 64 Corporate governance continued Induction and training of directors Following appointment to the board, directors receive an induction and training tailored to their individual needs. For further information, refer to the www.sappi.com website. Board committees The board has established committees to assist it with the discharge of its duties. These committees operate within written terms of reference set by the board. The board committees are as follows: Governance structure: Sappi board committees Other assurance providers External audit Shareholders via the AGM Internal audit Audit committee Board of directors Group risk management team CEO, CFO and management committees Nomination and governance committee Sustainability committee Compensation committee Human resources and transformation committee Audit committee The audit committee consists of ﬁ ve independent, non-executive directors and assists the board in discharging its duties relating to the:  oversight of the performance of the internal audit function; and  oversight of non-ﬁ nancial risks and controls, as well as information technology (“IT”) governance matters, through a combined assurance model which is in the process of being  safeguarding and efﬁ cient use of assets;  oversight role for the risk management function;  operation of adequate systems, and control processes;  reviewing of ﬁ nancial information and the preparation of accurate financial reporting in compliance with applicable regulations and accounting standards as well as sustainability information in the integrated report;  reviews compliance with the group’s code of ethics and developed. The audit committee can conﬁ rm that it:  is satisﬁ ed with the independence of the external auditor for the 2010 ﬁ nancial year;  has considered and approved non-audit services provided by the external auditors (this is only contemplated for those non- audit services where signiﬁ cant cost or efﬁ ciency beneﬁ ts are anticipated from utilising external audit as opposed to other external regulatory requirements; service providers);  oversight of the external auditors’ qualiﬁ cations, experience  has satisﬁ ed its responsibilities in terms of the charter, which is and performance; updated periodically; 2010 annual report 65  has met with senior management, which includes the CEO and the chief ﬁ nancial ofﬁ cer (CFO), at least four times during 2010, and with the management disclosure committee;  has considered and satisﬁ ed itself of the appropriateness of the expertise and experience of the CFO, who is an executive director;  has considered and recommended the internal audit mandate for approval to the board;  has requested an annual review of sustainability information reported in the integrated report;  has reviewed the disclosure of sustainability issues in the integrated report, and  has received assurance from management, as well as from internal and external assurance providers addressing signiﬁ cant risks facing the company. all functioned well and that there were no major shortcomings. The sustainability committee was only established after the 2010 self assessment evaluation process. Compensation committee The compensation committee consists of four independent non- executive directors. The committee ensures that the compensation philosophy and practices of the group are aligned to the strategy and performance goals. It reviews and agrees the various compensation programmes and in particular the compensation of executive directors and senior executives. It also reviews and agrees executive proposals on the compensation of non-executive directors for approval by the board and ultimately by shareholders. Human resources and transformation committee The human resources and transformation committee consists of The external and internal auditors attended audit committee four independent non-executive directors. The responsibilities of meetings and had unrestricted access to the committee and its the committee are, inter alia, to determine the group’s human chairman. The external and internal auditors met privately with the resource policy and strategy, assist with the hiring and setting of audit committee on a regular basis during 2010. Regional committees exist in the three major regions and are chaired by independent non-executive directors. These committees have a mandate from the group’s audit committee, to which they report on a regular basis and they each met four times during 2010. Dr D Konar has been designated as the audit committee ﬁ nancial terms and conditions of employment of executives, the approval of retirement policies and succession planning for management and the CEO as well as employment equity and transformation in South Africa. Sustainability committee and councils The structure of the sustainability executive management expert as required by the Sarbanes-Oxley Act of 2002, and committee, constituted during 2009, changed during 2010 attended the annual general meeting in 2010. Nomination and governance committee The nomination and governance committee consists of four and the committee is now a board committee comprising one independent non-executive director who chairs the committee, a non-executive director, as well as the CEO. The sustainability committee has a charter from the board. Its mandate is essentially independent non-executive directors which complies with the JSE to oversee the group’s sustainability strategies and platform. Limited Listings requirement. The committee considers the leadership requirements of the company including oversight of a succession plan for the board. The committee identiﬁ es and nominates suitable candidates for appointment to the board, on the basis of required attributes set out in the board charter, Sustainability councils provide strategic and operational support to the sustainability committee dealing with day-to-day sustainability issues, helping to develop and entrench people, planet and prosperity related initiatives in the business. for board and shareholders approval. The committee makes An initial independent review of sustainability information was recommendations on corporate governance practices and undertaken by internal audit during 2010. This review process will disclosures for Sappi and reviews compliance with corporate be developed further during 2011. governance requirements. The committee has oversight of the appraisal process of the board and its committees which consists of a self assessment process, with the results and recommended actions for improvement being communicated to the chairman of each committee and the board. The results of the 2010 self assessments of the board, audit committee, compensation committee, human resources and transformation committee, as well as of the nomination and governance committee revealed that For more information on sustainability at Sappi, refer to the www.sappi.com website as well as to the 2010 integrated report, where a summary can be found on pages 10 to 13. 66 Corporate governance continued Management committees Responsibility for the day to day management of the group has been assigned by the board to the CEO. To assist the CEO in discharging these duties, a number of management committees have been formed: Governance structure: Sappi management committees Audit committee Group risk management team Technical committees IT steering committee Board of directors CEO, CFO and executive committee Sustainability committee Sustainability councils Disclosure committee Treasury committee Executive committee This committee comprises executive directors and senior Technical committees The technical committees continue to focus on global technical management from Sappi Limited and the CEOs of the three main alignment, performance and efﬁ ciency measurement as well as regional business operations of the group. The CEO has assigned new product development. responsibility to the executive committee for a number of functional areas relating to the management of the group, including the development of policies and alignment of initiatives with regards to: strategic, operational, ﬁ nancial, governance, sustainability, social and risk processes. The executive committee meets monthly. Disclosure committee This committee comprises some members of the executive committee and senior management from various disciplines whose objective is to review and discuss ﬁ nancial information prepared for public release. Membership of the disclosure committee was expanded in 2009 to include the regional CFOs. The head of internal audit is invited to attend meetings. Treasury committee The treasury committee meets every second week to assess risk and advise as to best course of action on treasury related matters. Group risk management team The group risk management team is mandated by the Sappi Limited board to establish, co-ordinate and drive the risk management process throughout Sappi. It has established a risk management system to identify and manage signiﬁ cant risks. The group risk management team reports regularly on risks to the audit committee who have an oversight role with regards to the risk management processes at Sappi as well as to the board. The main focus in 2010, was the review and updating of a “corporate risk assessment” as well as a King III report gap analysis regarding the risk management processes at Sappi, which highlighted the need for some amendments to the group’s risk policy. A full report on Sappi’s risk management can be found on pages 61 to 62. IT Steering committee An IT Steering committee was established during 2010 to promote IT governance throughout the group. The Steering committee has a charter that was considered and approved by the audit committee and the board. An IT governance framework has been 2010 annual report 67 developed and IT reports have been presented to the audit The head of internal audit reports to the audit committee, meets committee and the board. A King III report gap analysis was with board members, has direct access to senior executive undertaken in 2010. This highlighted the need to revise certain IT management and is invited to attend various management policies and procedures. meetings. Financial statements The directors are responsible for overseeing the preparation and ﬁ nal approval of the group annual ﬁ nancial statements which are based on International Financial Reporting Standards as issued by During 2010, internal audit increased its focus on reviewing signiﬁ cant non-ﬁ nancial risk areas as well as sustainability and legal compliance activities. This coincided with activities to advise the business on development of a combined assurance model and the International Accounting Standards Board. The group’s results other recommendations made in the King III report on corporate are reviewed prior to submission to the board as follows: governance. The forensic activity was streamlined to increase  All four quarters – by the disclosure committee and audit committee; and  interim and ﬁ nal quarters – by external audit. Internal controls The board is responsible for the group’s systems of internal ﬁ nancial and operational control. The group’s internal controls and systems are designed to provide reasonable assurance as to the integrity and reliability of the annual ﬁ nancial statements and operational management information, that assets are adequately safeguarded against material loss and that transactions are properly authorised and recorded. Internal controls also provide assurance that the group’s resources are utilised efﬁ ciently and that the activities of the group are in compliance with applicable laws and regulations. As part of an ongoing comprehensive evaluation process, control effectiveness. An external quality assurance review of internal audit was conducted by the Institute of Internal Auditors (IIA) in 2010 and a “generally complies” rating was received. Company secretary All directors have access to the advice and services of the company secretary and are entitled to seek independent and professional advice about affairs of the group at the group’s expense. The company secretary is responsible for the duties set out in section 268G of the South African Companies Act of 1973. Speciﬁ c responsibilities include the provision of guidance to directors as to how to discharge their duties in the best interests of the company as well as arranging for the induction of new directors. Code of ethics Sappi requires its directors and employees to act with excellence, self assessments by management and independent reviews by integrity and respect in all transactions and with all stakeholders, internal audit and other assurance providers were undertaken with whom they interact, as reﬂ ected in the group’s code of ethics across the group of the effectiveness of various elements of the that commits the company and employees to sound business group’s ﬁ nancial, disclosure and other internal controls, procedures practices and compliance with legislation. The code of ethics is and systems. Where potential improvements have been identiﬁ ed, available on the company website. they are being addressed. The reviews enabled management to strengthen the group’s controls further. The results of the reviews did not indicate any material breakdown in the functioning of these controls, procedures and systems during the year under review. Legal compliance programme A legal compliance programme designed to increase awareness of, and enhance compliance with, applicable legislation is in place. The internal controls in place, including the ﬁ nancial controls, are The group compliance ofﬁ cer reports quarterly to the group audit considered to be effective. A Section 404 report in its Form 20-F committee. is to be ﬁ led with the United States Securities and Exchange Commission. Internal audit The group’s internal audit department has a current complement Interest in contracts The group has a policy regulating disclosure of interest in contracts. The policy dictates that all employees disclose any interest in contracts with Sappi in order to assess any possible of 18 persons. It has a speciﬁ c mandate from the audit committee conﬂ ict of interest. The policy also dictates that directors and and, independently appraises the adequacy and effectiveness senior ofﬁ cers of the group must disclose any interest in contracts of the group’s systems, internal controls and accounting records. as well as other appointments to assess any conﬂ ict of interest in It reports its ﬁ ndings to local and divisional management, the ﬁ duciary duties. During the year under review, save as disclosed in external auditors as well as the respective audit committees. the group annual ﬁ nancial statements, none of the directors had a Internal audit also provides a consulting service on risks, controls signiﬁ cant interest in any material contract or arrangement entered and governance developments. into by the company or its subsidiaries. 68 Corporate governance continued Insider trading The company has a code of conduct for dealing in company securities and follows the JSE Listings requirements in this regard. For further information please refer to the www.sappi.com website. Hotlines and follow up of tip-offs “Hotlines” have been implemented for all the regions in which the group operates. This service, operated by various independent companies, enables all stakeholders to anonymously report environmental, safety, ethics, accounting, auditing, control issues or other concerns. The follow-up of all reported matters is co- ordinated by group internal audit and reported to the audit committee. Stakeholder communication The board is responsible for presenting a balanced and under- standable assessment of the company’s position in reporting to stakeholders. A stakeholder engagement policy was developed in 2010. The reporting addresses material matters of signiﬁ cant interest and is based on principles of openness and substance over form. 2010 annual report 69 Compensation report This report sets out the group’s compensation philosophy and The committee reviewed and recommended the fees for non- practices in general and provides detail compensation information executives directors for approval by shareholders effective October for the executive directors, Mr R J Boëttger and Mr M R Thompson, 2010. and non-executive directors for the year ending September 2010. Against the back drop of 2009 which was a very challenging ﬁ nancial year for the group and the industry and considering the group’s ﬁ nancial performance in 2010, the committee reviewed and approved the compensation programmes and awards to employees. The compensation committee is responsible for:  ensuring that the compensation philosophy and practices of the group are aligned to the strategy and performance goals;  reviewing the compensation of executive directors and other senior key management;  satisfying shareholders that the senior executive compensation The committee gave due consideration to ensuring an appropriate is set by a committee of independent directors; and balance is maintained between the need for compensation that is competitive and would attract and retain key talent, while ensuring  reviewing and approving proposals (submitted by the group executive committee) on the fees and benefits of non- that compensation practices are aligned to good corporate executive directors. governance, risk taking and shareholder interest. Governance The compensation committee for 2010 consisted of: Prof M Feldberg (chairman of the committee) Mr H C Mamsch Mr J D Mckenzie Sir A N R Rudd Mr D C Brink (retired on 31 December 2009) Mr D C Brink retired from the board of directors on 31 December 2009. Mr Brink had also been the chairman of the compensation committee as a separate committee from the human resources committee since 2005. He was succeeded by Professor M Feldberg, who was appointed chairman of the compensation committee in January 2010. At the invitation of the committee, Dr D C Cronjé (group chairman), Mr R J Boëttger (group chief executive ofﬁ cer) and Ms L A Swartz (group head human resources) attended meetings but recused themselves when items pertaining to their own compensation were considered. Mr D J O’Connor (group company secretary) also attended meetings by invitation. All members of the committee are independent non-executive directors and all were members of the board and committee at ﬁ nancial year-end except for Mr D C Brink. No current committee member has any personal ﬁ nancial interest or conﬂ icts of interest arising from cross-directorships, or day–to–day involvement in running the business. During the course of the year, the committee met four times and conducted two further meetings by telephone conference. The committee reviewed and approved:  the management incentive plan rules for 2010;  the annual incentive plan awards for 2009;  the share grants made for 2010; and  the salary increases effective 01 January 2010. In exceptional circumstances, in order to appropriately compensate for shifting business goals or major unplanned events, the committee has the right to exercise discretion in authorising adjustments on both ﬁ nancial and individual performance targets, which it deems appropriate when evaluating performance against the targets at ﬁ nancial year end. During the year, the compensation committee undertook a self- evaluation of its effectiveness and concluded that the committee was acting effectively. Advice During the course of the year, management and the committee sought advice from the following external advisers: The HayGroup presented their ﬁ ndings on the benchmark analysis of Sappi’s compensation practices for executive directors and other senior key managers to the compensation committee. The report included a review of South African, European and North American compensation practices. Kepler and Associates provided adhoc advice to management on remuneration practices and trends to assist with background information and related support in formulating recommendations. Veriﬁ cation of Sappi’s performance and that of the peer group for the Performance Share Incentive Plan was conducted by Kepler and Associates for total shareholder return and, by KPMG for cash ﬂ ow return on net assets. In addition, the group companies participate in national and/or industry surveys to benchmark compensation practices. Compensation philosophy Sappi’s compensation programs are designed to achieve the company’s goals of attracting, motivating and retaining employees who can drive the achievement of ﬁ nancial and strategic objectives that are intended to build long-term shareholder value. The philosophy statement underpins all Sappi group company compensation policies across all geographies and functions. 70 Compensation report continued The design and components of our compensation programs gives Consideration is also given to how the results were achieved and due consideration to the nature of the paper and pulp industry whether the decisions and actions taken were consistent with which is characterised by its mature proﬁ le, cyclicality and slow our values. growth. The annual management incentive scheme aims to reward the The primary components of pay include base salary and beneﬁ ts delivery of short-term ﬁ nancial and individual performance goals. such as medical and retirement, annual incentive awards and long- term incentives. Long-term incentive plans aim to reward long-term sustained performance and create alignment with the delivery of value to the Compensation levels are set to reﬂ ect: shareholder.  competitive market practices;  internal equity;  company performance; and  individual performance. Incentives are capped in order that inappropriate business risk- taking is neither encouraged nor rewarded.  Market conditions – all components of pay are set competitively with due consideration to market pay practices of companies Sappi’s benchmarking philosophy is to pay at the median of the of similar size and complexity in regional markets. market for all components of pay except for short-term incentives which are targeted at the 75th percentile. Total compensation is  Risks – the compensation committee considers the management of risk to be important to the process of designing and between the 50th and 75th percentile of the market. implementing sustainable compensation structures. Therefore, Guiding principles We strive to reward employees in the group fairly and equitably in relation to job levels; experience and the employment market. the balance in terms of the pay mix components encourages prudent risk taking. Executive compensation is balanced in terms of the pay mix components to ensure that policies encourage behaviour consistent with the group’s risk reward  Job size – all jobs are sized using a consistent methodology to strategy. deﬁ ne pay structures and reward levels.  Performance – relevant components of compensation are linked to the performance of individuals and that of his/her speciﬁ c business unit or function and/or company. 2010 annual report 71 Compensation structure The compensation of executive directors and other key senior management comprises ﬁ xed and variable components. The following table summarises the major components of our compensation programmes. Component Purpose Characteristics Base salary  Attract and retain qualiﬁ ed talent  Fixed compensation  Reinforce the guiding principle of  Reviewed annually being competitive  Target median of the market  Recognise individual work experience  Individual increases are granted based on performance (merit), and level of responsibility and inﬂ uenced by internal and external equity and budget  Recognise individual performance constraints and maintain internal parity among  Used as a base for calculating other components of those performing like jobs compensation Retirement beneﬁ ts  To provide income for an individual  Deﬁ ned beneﬁ t and deﬁ ned contribution plans after they have stopped working  Majority of deﬁ ned beneﬁ t plans closed to new hires  Employees in deﬁ ned beneﬁ t legacy plans continue to accrue beneﬁ ts in such plans for both past and future service  Contributory and non-contributory plans  Company contributions vary based on local market practice Death and  To provide assurance to employees’  Based on local market practice disability beneﬁ ts family in the event of disability and/or  Disability beneﬁ t – is a percentage of base salary for a deﬁ ned death period  Death beneﬁ t – is a multiple of base salary Medical beneﬁ ts  To provide medical insurance to  Non-pensionable employees and their families in the  Market related event of ill-health  Appropriate in light of position Other beneﬁ ts Short-term incentive  Dependent on conditions, seniority/ grade and regional policy eg car beneﬁ ts, education assistance, meal allowances, service awards etc. Annual incentive  Focus participants on key annual  Variable compensation provided to reward performance over metrics the short-term  Motivate the attainment of short-term  Short-term incentive targets are determined annually goals for the applicable period  Speciﬁ c performance goals supporting both the company’s  Provide a competitive target overall goals for the year and the contributions of individuals in compensation opportunity his/her own area of responsibility are established  Is linked to the next higher business unit level  Paid out annually, provided the threshold is achieved  On-target cash award for executive directors is 85% of salary and ranges from 30% to 70% for other key senior managers based on seniority and location.  Includes the management incentive scheme (MIS) and other performance or bonus schemes – for employees who do not participate in the MIS 72 Compensation report continued Component Purpose Characteristics Long-term incentive Share options  Motivate the attainment of  Variable compensation provided to reward performance over long-term goals the long-term  Reinforce the guiding principle of  Vests 25% each year over four years alignment to shareholder interests  Expires eight years from date of grant  Provide an opportunity for eligible  No dividend earned employees to acquire an interest  Number of shares granted is benchmarked at levels of seniority in the equity of the company  Awarded annually Performance plan  Reinforce the guiding principle  Conditional grants awarded annually to executive directors shares for long-term performance and and other key senior managers of the company shareholder interests  Cliff vesting after four years if performance hurdles are met  Align executive interests with the  Performance is measured relative to a peer group of 14 other long-term operational growth industry related companies of the company  The number of shares allocated is benchmarked externally  Encourage long-term commitment and is performance based to the company  Is a wealth creation mechanism for executive directors and other key senior managers if the company outperforms the peer group Broad-based Black Economic Empowerment Management  Provide black managers with the  Established to meet the requirements of the Forestry Sector share ownership opportunity to acquire equity Charter plan in the company  Eligible employees receive an allocation based on seniority  Attract, motivate and retain black of “A” ordinary shares managers  Shares vest 40% after three years and thereafter 10% each year  Shares can only be taken-up after September 2019  Managers receive the net value in shares or cash at the end of the lock-in period Employee share  Provide employees who do not  Established to meet the requirements of the Forestry Sector ownership plan currently participate in either the Charter share option scheme or performance  Eligible employees receive an allocation based on seniority share plan to acquire equity in the of “A” ordinary shares and ordinary shares company  Shares vest 40% after three years and thereafter 10%  Provide historically disadvantaged each year employees an opportunity to  The shares can only be taken-up after September 2019 participate in equity based  Employees receive the net value in shares or cash at the end compensation of the lock-in period 2010 annual report 73 Balance between ﬁ xed and variable pay: Short-term incentives The balance between ﬁ xed and variable pay components will Executive directors and other senior managers participate in an change each year based on performance. Each executive director’s annual management incentive scheme. The scheme aims to total compensation consists of salary and benefits, annual reward the delivery of short-term ﬁ nancial targets which comprises incentives, and long-term incentives. of company/business unit and/or function performance as well as Assuming an on-target performance we would generally expect the compensation mix for executive directors to be in the region of: 40% base pay plus beneﬁ ts (ﬁ xed) 30% short-term (variable) 30% long-term (variable) Base salary the performance of individuals. Speciﬁ c to the management incentive scheme, ﬁ nancial and operational performance criteria account for 80% of the bonus award and individual performance accounts for 20% of the bonus award. During ﬁ nancial year 2010, the business performance criteria included operating proﬁ t, working capital and capital expenditure. Examples of other variable pay programs within the group include, Base salaries are benchmarked against the median of the relevant but are not limited to: market for each role and takes account of level, experience,  Production bonuses performance and market pricing.  Gain sharing programmes The committee also pays attention to internal equity.  Performance bonuses for staff who do not participate in the Salary increases for executive directors and key senior managers is consistent with the overall increase in salaries granted to other levels of employees in the company based upon the geography in which they live and work. Retirement benefi ts Across the group and based on location, it is the company’s policy to provide retirement beneﬁ ts through either a deﬁ ned contribution fund or a deﬁ ned beneﬁ t fund. management incentive scheme  Sales incentive plans For the ﬁ nancial period covered by this annual report, no bonus awards were paid to executive directors or any participants of the management incentive scheme as the performance threshold had not been met. A bonus incentive award based on the groups ﬁ nancial performance of 116% of target will be included in the calculation for payment to executives and other key senior managers in December 2010 In certain European countries, retirement beneﬁ ts are provided by (which payment falls within the 2011 ﬁ nancial year), based on the the state through social security systems. The design of both the performance achieved for the year ending September 2010. deﬁ ned beneﬁ t and deﬁ ned contribution schemes in Europe takes into account these social security beneﬁ ts when determining the Long-term incentives contribution tables and ﬁ nal pensions earned. Contributions to the plans differ by geography and are either contributing or non-contributing plans. Where deﬁ ned beneﬁ t plans exist in the company, they are mainly legacy plans closed to new hires. Employees who participate in these deﬁ ned beneﬁ t plans continue to accrue past and future beneﬁ ts in such plans. Mr Boëttger is a member of the Sappi Provident fund (deﬁ ned contribution plan) and Mr Thompson is a member of the Sappi Pension Fund (deﬁ ned beneﬁ t plan). The company operates two long-term-incentive plans: the Sappi Share Incentive Scheme and the Sappi Performance Share Plan. Under these plans executive directors and other eligible employees receive an annual grant. Performance plan shares are conditionally granted to executive directors and other key senior managers (approximately 40 employees). Vesting of the conditional grants take place after four years based on the relative performance of the company compared to 14 other industry related companies. The performance criteria for the four year performance period ending September Both Mr Boëttger and Mr Thompson are members of Sappi 2010 include Total Shareholder Return (TSR) and Cash ﬂ ow retirement funds. Other benefi ts Return on Net assets (CFRONA). The peer group consisted of the following companies: These include beneﬁ ts such as medical insurance, death and Abitibi Bowater; Holmen AB; Mondi Plc; Fibria Celulose SA; disability insurance, vehicle beneﬁ ts, leave and recognition of International Paper; M-real OYJ; UPM-Kymmene OYJ; Stora Enso service, and are applied where applicable in respective regions and OYJ; Domtar; MeadWestvaco; Nippon Paper Group; Weyerhauser; employee categories. Norkse Skogindustria; Oji Paper. 74 Compensation report continued For the four year performance period ending September 2009 and M R Thompson a vesting date of December 2009, Sappi’s performance relative to Mr Thompson’s, total compensation for the year of US$466,915 is the peer group measured on TSR was ranked in tenth place which 9.7% lower than that for 2009 of US$517,090. resulted in none of the conditional share awards vesting. Mr Thompson received a salary increase of 7% on the South Other participants receive an annual grant of share options which African portion of his salary which accounts for 70% and no salary vests 25% each year over 4 years and expires after 8 years. Executive compensation 2010: R J Boëttger Mr Boëttger’s total compensation for the year of US$923,997 is 13.6% lower than that for 2009 of US$1,070,283. increase on the offshore portion of his salary which accounts for 30% of his total annual salary. In US$ terms, Mr Thompson’s salary increased by 29.7% from US$261,921 to US$339,708. This year- on–year differential is a result of Mr Thompson receiving only eleven months pay instead of twelve months in 2009. He voluntarily forfeited one month’s salary in support of employees who experienced hardships as a result of a difﬁ cult 2009 ﬁ nancial Mr Boëttger received a salary increase of 7% on the South African year. Exchange rate currency ﬂ uctuations year-on-year also portion of his salary which accounts for 70% and no salary impacted his 2010 compensation. increase on the offshore portion of his salary which accounts for 30% of his total annual salary. In US$ terms, Mr Boëttger’s salary increased by 28.84% from US$551,185 to US$710,148 per annum. This year-on-year differential is a result of Mr Boëttger receiving only eleven months pay instead of twelve months in Mr Thompson did not receive a bonus in 2009 as the group did not meet the performance threshold. Such a bonus would have been paid out in the 2010 ﬁ nancial year. Based on the rules of the management incentive scheme which rewards performance targets based on operating proﬁ t, working capital and capital 2009. He voluntarily forfeited one month’s salary in support of expenditure, a bonus of US$102,582 was paid for the 2008 employees who experienced hardships as a result of a difﬁ cult ﬁ nancial year and is included in the 2009 total compensation 2009 ﬁ nancial year. Exchange rate currency ﬂ uctuations year-on- number. year also impacted his 2010 compensation. Mr Thompson did not sell any shares during the 2010 ﬁ nancial Mr Boëttger did not receive a bonus in 2009 as the group did not year. meet the performance threshold. Such a bonus would have been paid out in the 2010 ﬁ nancial year. Based on the rules of the management incentive scheme which rewards performance targets based on operating proﬁ t, working capital and capital Through the Sappi Performance Share Incentive Plan, Mr Thompson was awarded 120,000 conditional shares in December 2009. The share price at the date of issue was R33.85. expenditure, a bonus of US$347,548 was paid for the 2008 Top three executive’s salaries ﬁ nancial year and is included in the 2009 total compensation KING III recommends that the salaries of the top three executives, number. Mr Boëttger did not sell any shares during the 2010 ﬁ nancial year. Through the Sappi Performance Share Incentive Plan, Mr Boëttger was awarded 195,000 conditional shares in December 2009. The share price at the date of issue was R33.85. excluding executive directors should be disclosed. As the executive management team is made up of a group of international employees and to retain the conﬁ dentiality of salaries across the different geographies, the board decided not to disclose this information for each of the individuals but has instead disclosed the total salaries of the three employees concerned. In the 2010 ﬁ nancial year, the amount of the combined salaries (comprising base pay and beneﬁ ts) of the top three executive directors was US$1,793,560 (2009: US$1,723,787). 2010 annual report 75 Directors’ participation in the Sappi Limited Share Incentive Trust (Scheme) and The Sappi Limited Performance Incentive Trust (Plan) Executive directors Outstanding at beginning of year Number of shares held Issue 26 Issue 27 Issue 28a Issue 29 Performance Shares 30* Performance shares 30a* Performance shares 31a* Performance shares 32 Performance shares 34 Offered and accepted during the year Performance shares 35 Paid for during the year Number of shares Returned, lapsed and forfeited during the year Number of shares Outstanding at year end Number of shares held Issue 27 Issue 28a Issue 29 Performance shares 31a* Performance shares 32* Performance shares 34 Performance shares 35 Expiry dates Issue 27 Issue 28a Issue 29 Performance shares 31a* Performance shares 32* Performance shares34 Performance shares 35 R J Boëttger M R Thompson Total 2010 Total 2009 Allocated price No of shares Allocated price No of shares No of shares No of shares 484,000 484,000 968,000 339,000 R77.97 R62.34 R47.08 R46.51 R11.06 R11.06 R11.06 33,000 33,000 39,600 39,600 52,800 110,000 88,000 88,000 R11.06 R11.06 220,000 110,000 154,000 195,000 120,000 315,000 648,800 – – – (16,500) (195,800) (195,800) (3,300) 679,000 408,200 1,087,200 968,000 R62.34 R47.08 R46.51 R11.06 33,000 39,600 39,600 88,000 88,000 120,000 R11.06 R11.06 220,000 110,000 154,000 195,000 13 February 2011 30 December 2011 13 December 2012 02 July 2011 12 December 2011 22 December 2012 09 December 2013 Changes in executive directors’ share options, allocations shares and performance shares after year-end * Performance shares are issued when all conditions per note 28 are met. The position of participants in regard to the rights offer is also explained in note 28. 76 Compensation report continued Dealings in the Scheme and the Plan for the year ended September 2010: None Dealings in the Scheme and the Plan for the year ended September 2009: Director Executive directors M R Thompson Date paid for No of shares paid for Allocation price Market value at date of payment Deferred Sale 17 December 2008 Deferred Rights Sale 17 December 2008 Performance Plan 22 December 2008 Performance Plan 3,000 3,600 4,500 R49.00 R20.27 R0.00 R33.00 R33.00 R36.70 Rights 22 December 2008 5,400 R20.27 R36.70 Total 16,500 Employment and separation agreements Employment agreements typically stipulate notice periods required Non-executive directors’ fees reﬂ ect their services as directors and by the employee and employer in the event of termination of services on various sub-committees on which they serve, and the employment except for our North American operations where quantum of committee fees depends on whether the director is an employment is “at will”. Based on seniority these notice periods ordinary member or a chairman of the committee. Non-executive vary from one to eighteen months. Separation agreements, when appropriate, are negotiated with an affected employee with prior approval having been obtained in directors do not earn attendance fees; however, additional fees are paid for attendance at board meetings in excess of the ﬁ ve scheduled meetings per annum. terms of our governance structures. Non-executive directors do not participate in any incentive Employment contracts do not make any commitment to payment schemes or plans of any kind. in the event of a termination for cause or in the event of change- In determining the fees for non-executive directors, due consideration in-control. In cases in which there is a signiﬁ cantly increased is given to the fee practice of companies of similar size and likelihood of a transaction involving a business unit, limited complexity in the countries in which the directors are based. change-in-control protections may be agreed and implemented if it is deemed necessary for retention purposes. Non-executive director fees Directors are normally remunerated in the currency of the country The extreme volatility of currencies, in particular the Rand/ US Dollar exchange rate in the past few years, caused distortion of the relative fees in US Dollars paid to individual directors. Non-executive directors’ fees are proposed by the executive in which they live or work from. The remuneration is converted into committee, agreed by the compensation committee, recommended US Dollars (the group’s reporting currency) at the average by the board and approved at the annual general meeting by the exchange rate prevailing during the reporting years. Directors’ fees shareholders. are established in local currencies to reﬂ ect market conditions in those countries. 2010 annual report 77 The schedule below details the earnings of individual non-executive directors during 2010 and during 2009. Although the shareholders approved an increase of 7% for the South African based non-executive directors with effect from 1 October 2009, the difference in US Dollar terms between 2010 and 2009 is a result of the exchange rate currency ﬂ uctuations. 2010 Director US$ D C Brink(5) M Feldberg J E Healey D Konar H C Mamsch B Radebe A N R Rudd F A Sonn(5) K R Osar J D McKenzie D C Cronje(1) N P Mageza(2) R Thummer(3) M V Moosa(4) 2009 Director US$ D C Brink M Feldberg J E Healey D Konar H C Mamsch B Radebe A N R Rudd F A Sonn K Osar J D McKenzie D C Cronje(1) (1) Appointed in January 2008 (2) Appointed in January 2010 (3) Appointed in February 2010 (4) Appointed in August 2010 (5) Retired in December 2009 Board fees Committee fees Travel allowance 12,711 66,600 55,100 33,918 56,818 33,918 56,818 8,479 55,100 33,918 235,662 25,438 37,879 5,653 12,250 49,183 75,000 62,056 81,949 10,999 48,077 2,750 27,500 27,860 – 18,572 11,206 – 2,800 14,000 14,000 5,600 2,800 5,600 5,600 2,800 11,200 5,600 2,800 2,800 2,800 – Total 27,761 129,783 144,100 101,574 141,567 50,517 110,495 14,029 93,800 67,378 238,462 46,810 51,885 5,653 718,012 427,402 78,400 1,223,814 Board fees Committee fees Travel allowance 39,496 54,000 54,000 26,350 55,615 26,349 55,615 26,350 54,000 26,350 183,059 38,054 51,700 73,500 51,811 80,072 8,543 47,046 8.543 27,000 23,215 – 5,400 13,500 13,500 5,400 8,100 5,400 8,100 5,400 13,500 5,400 5,400 Total 82,950 119,200 141,000 83,561 143,787 40,292 110,761 40,293 94,500 54,965 188,459 601,185 409,484 89,100 1,099,769 Annual financial statements Annual ﬁ nancial statements for the year ended September 2010 Auditor’s report Directors’ approval Secretary’s certiﬁ cate Audit committee report Directors’ report Group income statements Group statements of comprehensive income Group balance sheets Group cash ﬂ ow statements Group statements of changes in equity Group income statements in Rands (convenience translation) Group statements of comprehensive income in Rands (convenience translation) Group balance sheets in Rands (convenience translation) Group cash ﬂ ow statements in Rands (convenience translation) Notes to the group annual ﬁ nancial statements 1. Business 2. Accounting policies 2.1 Basis of preparation 2.2 Summary of accounting policies 2.3 Critical accounting policies and estimates Page 80 81 81 82 84 88 88 89 90 91 92 92 93 94 95 95 95 95 95 98 2010 annual report 79 8. Dividends 9. Property, plant and equipment 10. Plantations 11. Deferred tax 12. Goodwill and intangible assets 13. Joint ventures and associates 14. Other non-current assets 15. Inventories 16. Trade and other receivables 17. Ordinary share capital and share premium 18. Other comprehensive income (loss) 19. Non-distributable reserves 20. Interest-bearing borrowings 21. Other non-current liabilities 22. Provisions 23. Notes to the cash ﬂ ow statements 24. Encumbered assets 25. Commitments 26. Contingent liabilities Page 113 114 116 117 119 119 120 121 121 124 126 126 127 132 133 134 136 137 138 27. Post-employment beneﬁ ts – pension and other beneﬁ ts 138 28. Share-based payments 29. Financial instruments 30. Related party transactions 31. Events after balance sheet date 32. Environmental matters 33. Acquisition Company auditor’s report Condensed Sappi Limited company income statements 2.4 Adoption of accounting standards in the current year 102 Condensed Sappi Limited company statements 2.5 Accounting standards, interpretations and amendments of comprehensive income to existing standards that are not yet effective 3. Segment information 4.1 Operating proﬁ t 4.2 Employment costs 4.3 Other operating expenses (income) 5. Net ﬁ nance costs 6. Taxation charge (beneﬁ t) 7. Earnings (loss) per share and headline earnings 102 103 108 109 109 110 110 Condensed Sappi Limited company balance sheets Condensed Sappi Limited company statements of changes in equity Condensed Sappi Limited company cash ﬂ ow statements 186 Notes to the condensed Sappi Limited company ﬁ nancial statements (loss) per share 112 Investments 147 155 177 178 178 180 183 184 184 185 186 187 188 80 Auditor’s report Independent auditor’s report to the members of Sappi Limited We have audited the group annual ﬁ nancial statements of Sappi relevant to the entity’s preparation and fair presentation of the ﬁ nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of Limited, which comprise the group balance sheets as at September expressing an opinion on the effectiveness of the entity’s internal 2010, and the group income statements, group statements of control. An audit also includes evaluating the appropriateness of comprehensive income, group statements of changes in equity accounting policies used and the reasonableness of accounting and group cash ﬂ ow statements for the year then ended, and a estimates made by management, as well as evaluating the overall summary of signiﬁ cant accounting policies and other explanatory presentation of the ﬁ nancial statements. notes, and the directors’ report, as set out on pages 84 to 91; pages 95 to 181 and 74 to 77. Directors’ responsibility for the fi nancial statements The company’s directors are responsible for the preparation and fair presentation of these ﬁ nancial statements in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of South Africa. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. We believe that the audit evidence we have obtained is sufﬁ cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the ﬁ nancial statements present fairly, in all material respects, the consolidated ﬁ nancial position of Sappi Limited as at September 2010, and its consolidated ﬁ nancial performance and consolidated cash ﬂ ows for the year then ended in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of South Africa. Auditor’s responsibility Our responsibility is to express an opinion on these financial Deloitte & Touche statements based on our audit. We conducted our audit in Per M J Comber accordance with International Standards on Auditing. Those Partner standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material mis- statement. 03 December 2010 Deloitte & Touche – Registered Auditors Buildings 1 and 2, Deloitte Place An audit involves performing procedures to obtain audit evidence The Woodlands, Woodlands Drive, Woodmead Sandton about the amounts and disclosures in the ﬁ nancial statements. Johannesburg, South Africa The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the ﬁ nancial statements, whether due to fraud or error. In making National Executive: G G Gelink Chief Executive A E Swiegers Chief Operating Ofﬁ cer G M Pinnock Audit D L Kennedy Tax & Legal and Risk Advisory L Geeringh Consulting L Bam Corporate Finance C R Beukman Finance T J Brown Clients & Markets N T Mtoba Chairman of the Board M J Comber Deputy Chairman of the Board. those risk assessments, the auditor considers internal control A full list of partners and directors is available on request. 2010 annual report 81 Directors’ approval The directors are responsible for the maintenance of adequate The directors are of the opinion, based on the information and accounting records and the content, integrity and fair presentation explanations given by the company’s ofﬁ cers and the internal of the annual ﬁ nancial statements of the group and Sappi Limited auditors, that the system of internal control provides reasonable company, and the related ﬁ nancial information included in this report. assurance that the ﬁ nancial records may be relied on for the preparation of the ﬁ nancial statements. However, any system of internal ﬁ nancial control can provide only reasonable, and not These have been prepared in accordance with International absolute assurance against material misstatement or loss. Financial Reporting Standards as issued by the International Accounting Standards Board, the JSE Limited Listings Requirements and in the manner required by the South African The directors have reviewed the group’s budget and cash ﬂ ow forecasts. This review, together with the group’s ﬁ nancial position, existing borrowing facilities and cash on hand, has satisﬁ ed the Companies Act. In preparing the ﬁ nancial statements, the group directors that the group will continue as a going concern for the applied appropriate accounting policies supported by reasonable foreseeable future. Therefore the group continues to adopt the judgements and estimates. The auditors are responsible for going concern basis in preparing its ﬁ nancial statements. auditing the annual ﬁ nancial statements in the course of executing their statutory duties. The directors acknowledge that they are ultimately responsible for the system of internal ﬁ nancial control established by the group and are committed to maintaining a strong control environment. Details relating to the group’s internal control environment, including the requirement to comply with section 404 of the U.S. Sarbanes-Oxley Act (a requirement for companies listed on the New York Stock Exchange), are set out in the Corporate The report and annual ﬁ nancial statements of the group and the company appear on pages 84 to 188 and were approved by the board of directors on 03 December 2010 and signed on its behalf by: R J Boëttger M R Thompson Chief executive ofﬁ cer Chief ﬁ nancial ofﬁ cer Governance section of this report. Sappi Limited Secretary’s certiﬁ cate In terms of section 268G(d) of the Companies Act, 61 of 1973 (as amended) of South Africa, I hereby certify that, to the best of my knowledge and belief, the company has lodged with the Registrar of Companies, for the ﬁ nancial year ended September 2010, all such returns as are required of a public company in terms of this Act and that such returns are true, correct and up to date. Sappi Southern Africa (Pty) Limited Secretaries per D J O’Connor Group secretary 03 December 2010 82 Audit committee report for the year ended September 2010 The legal responsibilities of the Sappi Limited group audit committee (the committee) are set out in the South African Companies Act, External audit The group’s external auditors are Deloitte & Touche. Fees paid 61 of 1973 (as amended). These responsibilities, together with the to the auditors are disclosed in note 4 to the annual ﬁ nancial requirements of compliance with appropriate governance and statements. international best practice, are incorporated in the committee’s charter, which is reviewed annually and approved by the board. Composition of the committee All independent non-executive directors, with the exception of the Key functions and responsibilities of the committee The key functions and responsibilities of the committee as outlined in the charter are to: chairman of the board, are eligible to serve on the committee. The ■ assist the board of directors in its evaluation of the adequacy nomination and governance committee recommends to the board and efﬁ ciency of the internal control systems, accounting any appointments to or removals from the board, which in turn is practices, information systems and auditing processes applied responsible for the composition of the committee. The committee within the group in the day-to-day management of its business; has three or more members, all of whom are financially literate, with three members forming a quorum. Access to training is provided on an ongoing basis to assist members in discharging their duties. ■ facilitate and promote communication between the board, management, the external auditors and the group head internal audit; ■ introduce such measures as in the committee’s opinion may serve to enhance the credibility and objectivity of financial The committee comprised the following members during the year statements and reports prepared with reference to the affairs of and to the date of this report, except where noted otherwise: the group; Dr D Konar (Chairman) (appointed in January 2004, auditors who, in the opinion of the committee, are independent ■ nominate for appointment as auditors the company registered Mr J E Healey Mrs K R Osar Mr P N Mageza Mr H C Mamsch Mr D C Brink chairman from January 2007) (appointed in August 2004) (appointed in November 2007) (appointed in February 2010) (retiring 31 December 2010) (retired 31 December 2009) of the group; ■ determine the fees to be paid to the auditors and the auditors’ terms of engagement; ■ ensure that the appointment of the auditors complies with the Companies Act and any other legislation relating to the appointment of auditors; ■ determine the nature and extent of any non-audit services that Biographical details of the current members of the committee are the auditors may provide to the group; set out on pages 18 to 20. ■ approve any contract with the auditors for the provision of non- The chief executive officer, chief financial officer, group risk manager, group head internal audit and representatives of the external auditors are invited to attend the committee meetings. The chairman of the board is entitled to attend meetings ex audit services to the group; ■ receive and deal appropriately with any complaints (whether from within or outside the group) relating either to the accounting practices and internal audit of the group or to the contents or auditing of its ﬁ nancial statements, or any other related matter ofﬁ cio. The external auditors attend all committee meetings and thereto; and separate meetings are held to afford them the opportunity of ■ perform such further functions as may be prescribed. discussion without the presence of management or internal auditors. The internal auditors attend all committee meetings and are similarly afforded separate meetings with the committee. Internal audit Internal audit is an independent assurance function, forming part of the Enterprise-wide Risk Management Framework (ERMF). The committee reports that it has adopted appropriate formal terms of reference to discharge its responsibilities, has regulated its affairs in compliance with its charter and has discharged all its responsibilities as contained therein. Effectiveness of internal control The committee monitors the group’s internal controls for The group head internal audit has a direct reporting line to the effectiveness and adherence to the ERMF. The emphasis on risk committee chairman and also meets regularly with the chief governance is based on the group’s ERMF. The ERMF places executive officer and the chief financial officer. Further details weight on accountability, responsibility, independence, reporting, on the internal audit function are contained in the corporate communications and transparency, both internally and with all our governance report. key external stakeholders. 2010 annual report 83 Speciﬁ c responsibilities of the committee include the following: Internal control ■ monitoring management’s success at creating and maintaining an effective internal control environment throughout the group and at demonstrating and stimulating the necessary respect for this control environment; and ■ monitoring the identiﬁ cation and correction of weaknesses and breakdowns of systems and internal controls. Financial control, accounting and reporting ■ monitoring the adequacy and reliability of management information and the efﬁ ciency of management information systems; ■ monitoring of the adequacy and efficiency of the group’s information systems and receiving from them reports thereon; ■ reviewing quarterly, interim and final financial results and statements and reporting for proper and complete disclosure of timely, reliable and consistent information and conﬁ rming the appropriateness of accounting policies used; ■ evaluating on an ongoing basis the appropriateness, adequacy and efﬁ ciency of accounting policies and procedures, compliance with generally accepted accounting practice and overall accounting standards as well as any changes thereto; ■ discussing and resolving any signiﬁ cant or unusual accounting problems; ■ reviewing and monitoring capital expenditure throughout the group for adequate control, monitoring and reporting; ■ monitoring the management and reporting of tax-related matters; ■ monitoring the management and effectiveness of the accounting and taxation risks as set out in the group’s ERMF; and ■ reviewing and monitoring all key performance indicators to ensure that decision making capabilities and the accuracy of the related reporting and ﬁ nancial results they aid are maintained at industry levels. ■ considering whether the extent of reliance placed on internal audit by the external auditors is appropriate and whether there are any signiﬁ cant gaps between internal and external audit. Regulatory reporting ■ reviewing the adequacy of the regulatory reporting processes, including the quality of that reporting and the adequacy of systems and people to perform these functions; ■ considering the contents of any regulatory reports related to the key functions of the committee and monitoring management actions to resolve any issues identiﬁ ed; and ■ performing such other functions as are prescribed in the regulations relating to the South African Companies Act. Having considered, analysed, reviewed and debated information provided by management, internal audit and external audit, the committee conﬁ rmed that: ■ the internal controls of the group have been effective in all material respects throughout the year under review; ■ these controls have ensured that the group’s assets have been safeguarded; ■ proper accounting records have been maintained; ■ resources have been utilised efﬁ ciently; and ■ the skills, independence, audit plan, reporting and overall performance of the external auditors are acceptable and that it recommends their re-appointment in 2011. Appropriateness of the expertise and experience of the chief ﬁ nancial ofﬁ cer In terms of the JSE Listings Requirements, the audit committee at its meeting held on 04 November 2010, satisﬁ ed itself as to the appropriateness of the expertise and experience of the chief ﬁ nancial ofﬁ cer. Internal audit ■ direct reporting by the group head internal audit to the chairman Annual ﬁ nancial statements The committee has: of the committee; ■ monitoring the effectiveness of the internal audit function in terms of its scope, plans, coverage, independence, skills, stafﬁ ng, overall performance and position within the organisation; ■ monitoring and challenging, where appropriate, action taken by management with regard to adverse internal audit ﬁ ndings; and ■ forming a view on the adequacy and effectiveness of the control environment. External audit ■ recommending to the board the selection of the external auditors and approving their audit fees; ■ monitoring the effectiveness of external auditors in terms of their skills, independence, audit plan, reporting and overall performance; ■ approving non-audit services to be rendered by the external ■ reviewed and discussed the audited annual ﬁ nancial statements included in the annual report with the external auditors, the chief executive ofﬁ cer and the chief ﬁ nancial ofﬁ cer; ■ reviewed signiﬁ cant adjustments resulting from external audit queries and accepted any unadjusted audit differences; and ■ received and considered reports from the internal auditors. The committee concurs with and accepts the external auditors’ conclusions on the annual financial statements and has recommended the approval thereof to the board. The board has subsequently approved the ﬁ nancial statements, which will be open for discussion at the forthcoming annual general meeting. Dr D Konar Audit committee chairman auditors and monitoring conﬂ icts of interest; and 03 December 2010 84 Directors’ report for the year ended September 2010 Your directors submit their report for the year ended September 2010. Business of Sappi Limited (group or the company) and its operating companies mentioned below (the group) The group manufactures and sells a wide range of pulp, paper, chemical cellulose and wood products for use in almost every sphere of economic activity. The group is comprised of Sappi Fine Paper North America, Sappi Fine Paper Europe and Sappi Southern Africa which are its reportable segments. Sappi Fine Paper which comprises Sappi Fine Paper Europe and Share capital As at September 2010 the authorised and issued share capital of Sappi were as follows: Authorised: 725,000,000 ordinary shares of ZAR1 each ZAR725 million 19,961,476 “A” ordinary shares of ZAR1 each ZAR20 million Issued: 541,446,223 ordinary shares of ZAR1 each ZAR541 million 19,961,476 “A” ordinary shares of ZAR1 each ZAR20 million Share premium US$1,564 million Sappi Fine Paper North America, has manufacturing and marketing During the year, the following share issues occurred: facilities in North America, Europe and Asia and produces mainly high quality branded coated ﬁ ne paper. It also manufactures uncoated graphic and business paper, coated and uncoated speciality paper, and casting release paper used in the manufacture of artiﬁ cial leather and textured polyurethane applications. Sappi ■ 19,961,476 “A” ordinary shares were created and issued as part of Sappi’s 2010 Broad-based Black Economic Empowerment transaction. These are eliminated at a consolidated group level as they are treated as treasury shares. ■ 4,328,359 ordinary shares were issued as part of the unwinding Southern Africa (Sappi Paper and Paper Packaging, Sappi Forests of the 2006 Black Economic Empowerment transaction. and Sappi Chemical Cellulose) based in southern Africa, produces commodity paper products, pulp, chemical cellulose, uncoated ﬁ ne paper and forest and timber products for southern Africa and export markets. The group operates a trading network called Sappi Trading for the international marketing and distribution of chemical cellulose and market pulp throughout the world and of the group’s other products in areas outside its core operating regions of North America, Europe and southern Africa. The ﬁ nancial results and position associated with Sappi Trading are allocated to our reportable segments. Reporting period The group’s ﬁ nancial period ends on the Sunday closest to the year end date and results are reported as if at the year end date. International Financial Reporting Standards (IFRS) As a South African company and in terms of the requirements of the JSE Limited (JSE), Sappi’s ﬁ nancial reporting is based on International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the IASB, the AC 500 standards issued by ■ Included in the 541,446,233 ordinary shares are 41,896,595 treasury shares. See note 17 of the annual ﬁ nancial statements for further information relating to the share capital of Sappi Limited. Purchase of shares by a subsidiary Through a wholly-owned subsidiary, the Sappi group has in previous ﬁ scal years acquired approximately 21.4 million Sappi Limited ordinary shares (treasury shares) on the open market of the JSE Limited. No shares were acquired during ﬁ scals 2010 and 2009, other than the take up of the rights issue in December 2008. Some of these treasury shares, have been, and will continue to be, utilised to meet the requirements of the Sappi Limited Share Incentive Trust and the Sappi Limited Performance Share Incentive Trust from time to time. Considering that it is the group’s stated intention to reduce debt, it is unlikely that the group will seek approval for the purchase of Sappi shares in the foreseeable future. Signiﬁ cant announcements and events during the year under review and subsequent to year end During the 2010 ﬁ nancial year, the following signiﬁ cant announce - ments/events took place: the Accounting Practices Board, and the requirements of the ■ We completed a share-based Broad-based Black Economic South African Companies Act of 1973. The US Dollar is the major trading currency of the pulp and paper industry. The group reports its results in US Dollars in order to facilitate the understanding of the results. Empowerment transaction in June 2010 following shareholder approval in April 2010. In one leg of the transaction Lereko Investments, our strategic empowerment partner, exchanged its interest in Sappi’s plantation land for Sappi Limited shares. The major part of the transaction, which is fully described on our For the convenience of users, the income statements, balance website, is primarily for the beneﬁ t of our employees in southern sheets and cash ﬂ ow statements of the group have been Africa. See also notes 17 and 28 of our annual financial translated into South African Rands on pages 92 to 94. statements for further details relating to this transaction. 2010 annual report 85 ■ The total potential value of the transaction amounts to ZAR814 million, with a total potential shareholding of 4.5% of the issued share capital of Sappi Limited. This share-based Broad-based Black Economic Empowerment transaction translates into the empowerment of approximately 30% of Sappi’s South African business, and increased its overall scorecard empowerment performance, from an independent empowerment rating agency, of BB last year to AA this year. ■ On 20 April 2010, Sappi announced that it had extended its plantation holdings in South Africa with the purchase of the Sjonajona plantation (14,500 ha in extent) from Mondi. ■ On 15 July 2010, Sappi announced the consolidation of its Southern African paper and paper packaging businesses in order to strengthen its ability to meet customer requirements and develop new business opportunities. Financing During the year, in which there was no new signiﬁ cant debt acquired, the group repaid the following borrowings: The Sappi Limited Share Incentive Trust (the Scheme) and The Sappi Limited Performance Share Incentive Trust (the Plan) Sappi has two share incentive schemes in place, namely the Scheme and the Plan for the purpose of enabling Sappi Limited to allot shares and grant options in respect of ordinary shares to present employees, including executive directors, employees of its subsidiaries and employees seconded to joint ventures. The maximum number of shares which may be acquired by participants under both the Scheme and the Plan is 42,700,870 shares. Of the 42,700,870 shares, 23,371,122 shares have been offered and are outstanding at the end of ﬁ scal 2010 leaving the remainder of 19,329,748 shares that can still be allocated to participants. The group has 21,935,119 treasury shares at year end, some of which have been and will continue to be utilised to meet the requirements of the Scheme and the Plan from time to time. During the year, 999,200 credit sale and combined option/deferred sale allocations under the Sappi Limited Share Incentive Scheme ■ In March 2010, the North American Municipal Bonds of were cancelled in terms of the rules of the Scheme. The allocations US$106 million were repaid at par value; ■ An amount of US$29 million of our 7.5% Guaranteed Notes due 2032 was repurchased in the open market early in the third ﬁ scal quarter for US$24 million; and ■ In June 2010, Sappi made an early repayment of the ﬁ rst instalment on a syndicated loan with Österreichische Kontrollbank of EUR80 million (US$99 million) due in December 2010. The group is in a strong liquidity position with large cash resources of US$792 million as at September 2010 with cash exceeding the amount of short term interest-bearing debt of US$696 million, access to an undrawn committed revolving credit facility of EUR209 million, and a much improved long term debt maturity proﬁ le with the average time to maturity of 4.1 years. Substantially all non-South African long-term debt is supported by a Sappi Limited guarantee. Net cash generated for the year was US$341 million. Covenants on certain international term debt are similar and are detailed in the chief ﬁ nancial ofﬁ cer’s report. Borrowing and ﬁ nancing The group’s net debt at September 2010 amounted to US$2.2 billion (September 2009: US$2.6 billion). The company’s Articles of Association allow net borrowings of up to US$5.6 billion. Details of the non-current borrowings are set out in note 20 of the group annual ﬁ nancial statements. Dividends In accordance with the group’s stated primary target of reducing debt to below US$2.0 billion, the board has decided not to declare a dividend for the ﬁ nancial year ended September 2010. Refer to the chief ﬁ nancial ofﬁ cer’s report for details on the restrictions limiting the payment of cash dividends. were made in March 2002 (in respect of 470,000 shares at a price of ZAR147.20 per share) and in December 2008 (in respect of 529,200 shares, arising from the 2008 rights offer at a price of ZAR20.27). The allocations would have expired on 28 March 2010 and the average price payable by participants for the allocations at that time (ZAR77.97 per share) would have been well above the market price. The board considered that it would not have been in the best interests of the company to enforce payment by the participants concerned. The purpose of the Share Scheme is to offer participants an incentive and to have insisted that participants pay for the allocations concerned, would have imposed a hardship on the participants and would have served as a disincentive. Note 28 of the group annual ﬁ nancial statements provides further details regarding the Scheme and the Plan. Insurance The group has an active programme of risk management in each of its geographical operating regions to address and reduce exposure to property damage and business interruption. All production and distribution units are subjected to regular risk assessments by external risk engineering consultants, the results of which receive the attention of senior management. The risk mitigation programmes are co-ordinated at group level in order to achieve a standardisation of methods. Work on improved enterprise risk management is on-going and aims to lower the risk of incurring losses from uncontrolled incidents. Fixed assets During the year, both the Kangas and Usutu mills were closed following their announced potential closures in October 2009. 86 Directors’ report continued There have been no major changes to the nature and use of the Professor M Feldberg was appointed Lead Independent director in group’s fixed assets. Note 9 of the group annual financial May 2010. statements provides further details regarding the ﬁ xed assets of Sappi Limited. Litigation We become involved from time to time in various claims and lawsuits incidental to the ordinary course of our business. We are not currently involved in legal proceedings which, either individually or in the aggregate, are expected to have a material adverse effect on our business, assets or properties (see note 26 of the group annual ﬁ nancial statements). Directors and secretaries The composition of the board of directors is provided on pages 18 At the year end there were 14 directors, two of whom were executive directors. Ten of the 12 non-executive directors were independent. The independence of those directors who are designated as independent, was reviewed and conﬁ rmed during the year by the nomination and governance committee. It was announced earlier in the year that Mr H C Mamsch will be retiring as a director on 31 December 2010. In terms of the company’s Articles of Association, Dr D C Cronjé, Professor M Feldberg, Mrs K R Osar and Mrs B Radebe will retire by rotation from the board at the forthcoming annual general meeting and all being eligible, have offered themselves for to 20. During the year, Mr D C Brink and Dr F A Sonn retired as re-election. Having assessed the individual performances of the directors. Messrs N P Mageza and M V Moosa and Dr R Thummer directors concerned, the board recommends each of them for were appointed to the board during the year. In terms of the re-appointment. company’s Articles of Association, the appointments of Mr Mageza and Dr Thummer were conﬁ rmed at the annual general meeting on 01 March 2010, and they were re-appointed as directors on that date. It will be necessary to conﬁ rm the appointment of Mr Moosa at the forthcoming annual general meeting. He will, in Personal details of Mr M V Moosa, Dr D C Cronjé, Professor M Feldberg, Mrs K R Osar and Mrs B Radebe are set out in the Notice of Annual General Meeting on pages 192 to 196 of this report. terms of the Articles of Association, retire from the board at that The remuneration and fees of the directors of Sappi Limited are set meeting, and being eligible, has offered himself for re-election. out in the Compensation report on pages 69 to 77. The beneﬁ cial interests of directors in the shares of the company (including options and rights and options in terms of the Scheme and conditional share awards in terms of the Plan) are set out below: 2010 2009 Direct interests Indirect interests Direct interests Director Beneﬁ cial Non-executive directors D C Brink R Thummer M V Moosa(1) Executive directors R J Boëttger M R Thompson – 7,542 – 85,000 20,517 Vested obligations to purchase or repay loans Beneﬁ cial Beneﬁ cial – – – – 72,600 – – 626,998 – 7,542 – – – 85,000 20,517 Vested obligations to purchase or repay loans – – – – 89,100 Indirect interests Beneﬁ cial 22,000 – – – – Total 113,059 72,600 626,998 113,059 89,100 22,000 (1) M V Moosa holds 31.8% share of Lereko Investment (Pty) Limited which holds a total of 1,971,693 Sappi Limited shares as part of the BBBEE transaction described in note 28 and note 30 of the group annual ﬁ nancial statements. 2010 annual report 87 There have not been any changes in the direct or indirect beneﬁ cial interest of the directors and their associates between September 2010 and the date of this report. Other than Mr M V Moosa’s interest in the BEE transaction described above and in notes 28 and 30 of the group annual ﬁ nancial statements, the directors have certiﬁ ed that they did not have any material interest in any signiﬁ cant transaction with either the company or any of its subsidiaries. Mr M V Moosa was appointed a director of the company after the conclusion of the latest BEE transaction. Other than his interest in the BEE transaction there are no other directors’ interests in contracts. A register of interests of directors and other executives in the shares of the company is available to shareholders and the public on request. Subsequent to year end, Sappi Southern Africa (Pty) Limited was appointed secretaries to Sappi Limited in place of Sappi Management Services (Pty) Limited. Details of the secretaries and their business and postal addresses are set out on page 198. Special resolutions The following is a list of the special resolutions passed by the company and its South African incorporated subsidiaries during the year: ■ Sappi Limited – increase in authorised share capital by the creation of “A” ordinary shares, amendment to the Articles of Association to set out rights and conditions attaching to the “A” ordinary shares, authority for speciﬁ c repurchase of “A” ordinary shares and authority for ﬁ nancial assistance in connection with “A” ordinary shares. ■ Sappi Management Services (Pty) Limited – transfer of all assets and liabilities of the company to Sappi Manufacturing (Pty) Limited, now Sappi Southern Africa (Pty) Limited. ■ Sappi Manufacturing (Pty) Limited – regarding entitlement to voluntarily redeem Class “A”, Class “B”, Class “C” and Class “D” preference shares and change of name to Sappi Southern Africa (Pty) Limited. ■ Sappi Waste Paper (Pty) Limited – change of name to Sappi Reﬁ bre (Pty) Limited and change of main business and main object of the company. Subsidiary companies Details of the company’s signiﬁ cant subsidiaries are set out in Annexure A on page 188. 88 Group income statements for the year ended September 2010 US$ million Sales Cost of sales Gross proﬁ t Selling, general and administrative expenses Other operating expenses Share of proﬁ t from associates and joint ventures Operating proﬁ t (loss) Net ﬁ nance costs Finance costs Finance revenue Finance cost capitalised Net foreign exchange gains Net fair value (gain) loss on ﬁ nancial instruments Proﬁ t (loss) before taxation Taxation charge (beneﬁ t) Proﬁ t (loss) for the year Basic weighted average number of ordinary shares in issue (millions) Basic earnings (loss) per share (US cents) Diluted earnings (loss) per share (US cents) Group statements of comprehensive income for the year ended September 2010 US$ million Proﬁ t (loss) for the year Note 2010 2009 2008 4 4 4 13 4 5 6 7 7 6,572 5,786 5,369 5,029 5,863 5,016 786 448 10 (13) 341 255 309 (16) – (17) (21) 86 20 66 340 385 39 (11) (73) 145 198 (61) – (17) 25 (218) (41) (177) 847 385 165 (17) 314 126 181 (38) (16) (8) 7 188 86 102 516.7 482.6 362.2 13 13 (37) (37) 28 28 Other comprehensive income (loss), net of tax 18 Exchange differences on translation of foreign operations Actuarial (losses) gains on pension funds Movement on available-for-sale ﬁ nancial assets Movement in hedging reserves Deferred tax on other comprehensive income (loss) Total comprehensive income (loss) for the year Note 2010 2009 (177) (197) 14 (229) – (14) 32 (374) 2008 102 (256) (262) 7 – – (1) (154) 66 8 52 (71) 2 14 11 74 Group balance sheets at September 2010 US$ million Assets Non-current assets Property, plant and equipment Plantations Deferred tax assets Goodwill and intangible assets Joint ventures and associates Other non-current assets Financial instruments Current assets Inventories Trade and other receivables Financial instruments Cash and cash equivalents Total assets Equity and liabilities Shareholders’ equity Ordinary share capital and share premium Non-distributable reserves Foreign currency translation reserve Hedging reserves Retained earnings Non-current liabilities Interest-bearing borrowings Deferred tax liabilities Financial instruments Other non-current liabilities Current liabilities Interest-bearing borrowings Overdraft Financial instruments Trade and other payables Taxation payable Provisions Total equity and liabilities 2010 annual report 89 Note 2010 2009 9 10 11 12 13 14 29 15 16 29 17 19 20 11 29 21 20 29 22 4,653 3,660 687 53 27 125 82 19 4,867 3,934 611 56 32 123 101 10 2,531 2,430 836 888 15 792 792 858 10 770 7,184 7,297 1,896 1,638 161 (385) 1 481 3,249 2,317 386 – 546 2,039 691 5 3 1,271 36 33 1,794 1,541 143 (354) (14) 478 3,662 2,726 355 24 557 1,841 601 19 14 1,116 56 35 7,184 7,297 90 Group cash ﬂ ow statements for the year ended September 2010 US$ million Note 2010 2009 2008 23.1 23.2 23.3 23.4 23.5 23.6 33 Cash retained from operating activities Cash generated from operations – (Increase) decrease in working capital Cash generated from operating activities – Finance costs paid – Finance revenue received – Taxation paid Cash available from operating activities – Dividends paid Cash utilised in investing activities Investment to maintain operations – Replacement of non-current assets – Proceeds on disposal of non-current assets – Decrease in other non-current assets Investment to expand operations – Additions of non-current assets – Acquisition Cash effects of ﬁ nancing activities Proceeds from interest-bearing borrowings* Repayment of interest-bearing borrowings* Rights issue proceeds Share issue costs Costs directly attributable to the bond offerings (Decrease) increase in bank overdrafts Net movement in cash and cash equivalents Cash and cash equivalents at beginning of year Translation effects Cash and cash equivalents at end of year 23.7 * Includes gross cash ﬂ ows relating to ongoing short-term ﬁ nancing activities. 529 737 (5) 732 (206) 12 (9) 529 – (188) (150) (173) 21 2 (38) (38) – (256) 204 (444) – (3) – (13) 85 770 (63) 792 461 432 152 584 (107) 26 (5) 498 (37) (762) (143) (147) 2 2 (619) (29) (590) 707 355 623 1 624 (139) 13 (70) 428 (73) (494) (239) (250) 7 4 (255) (255) – 49 3,469 (3,222) 2,077 (2,032) 575 (31) (78) (6) 406 274 90 770 – – – 4 (90) 364 – 274 2010 annual report 91 Group statements of changes in equity for the year ended September 2010 Number of ordinary shares Ordinary share capital Share premium Ordinary share capital and share premium Non- distributable reserves Foreign currency translation reserve Hedging reserve Retained earnings Total equity US$ million Balance – September 2007 228.5 34 791 825 Transfer from retained earnings Share-based payments Transfers to Sappi Limited Share Incentive Trust Total comprehensive loss Dividends – US$0.32 per share* – – 0.7 – – Balance – September 2008 229.2 Transfer from retained earnings Share-based payments Transfers to Sappi Limited Share Incentive Trust Rights issue proceeds Costs directly attributable to the rights issue Issue to M-real Total comprehensive loss Dividends – US$0.16 per share* – – 0.3 275.0 – 11.2 – – Balance – September 2009 515.7 Transfer from retained earnings Share-based payments Transfers from Sappi Limited Share Incentive Trust Broad-based Black Economic Empowerment (BBBEE) transaction Costs directly attributable to the BBBEE transaction Total comprehensive income – – (0.5) 4.3 – – – – – (6) – 28 – – – 28 – 1 13 – 70 – – – 1 – 3 – – 6 (118) – 679 – – 2 – – 6 (124) – 707 – – 2 547 575 (31) 44 230 – (31) 45 243 – 1,471 1,541 – – (6) 19 (3) 83 – – (6) 20 (3) 86 Balance – September 2010 519.5 74 1,564 1,638 Note reference: 17 * Dividends relate to the previous ﬁ nancial year’s earnings but were declared subsequent to year end. 114 8 10 – (8) – 124 6 9 – – – – 4 – 143 2 17 – – – (1) 161 19 9 – – – (130) – (121) – – – – – – (233) – (354) – – – – – (31) (385) – – – – – – – – – – – – – (14) – (14) – – – – – 15 1 868 (8) – – 108 (73) 895 (6) – – – – – (374) (37) 478 (2) – – – – 5 1,816 – 10 6 (154) (73) 1,605 – 9 2 575 (31) 45 (374) (37) 1,794 – 17 (6) 20 (3) 74 481 1,896 92 Group income statements in Rands convenience translation for the year ended September 2010 ZAR million Sales Cost of sales Gross proﬁ t Selling, general and administrative expenses Other operating expenses Share of proﬁ t from associates and joint ventures Operating proﬁ t (loss) Net ﬁ nance costs Finance costs Finance revenue Finance cost capitalised Net foreign exchange gains Net fair value (gain) loss on ﬁ nancial instruments Proﬁ t (loss) before taxation Taxation charge (beneﬁ t) Proﬁ t (loss) for the year Basic weighted average number of ordinary shares in issue (millions) Basic earnings (loss) per share (SA cents) Diluted earnings (loss) per share (SA cents) Group statements of comprehensive income in Rands convenience translation for the year ended September 2010 ZAR million Proﬁ t (loss) for the year Other comprehensive income (loss), net of tax Exchange differences on translation of foreign operations Actuarial (losses) gains on pension funds Movement on available-for-sale ﬁ nancial assets Movement in hedging reserves Deferred tax on other comprehensive income (loss) Total comprehensive income (loss) for the year Unaudited 2010 2009 2008 49,235 43,347 48,393 45,329 43,559 37,266 5,888 3,356 74 (97) 2,555 1,911 2,315 (120) – (127) (157) 644 150 494 516.7 97 97 3,064 3,470 351 (99) (658) 1,307 1,785 (550) – (153) 225 (1,965) (370) (1,595) 482.6 (333) (333) 6,293 2,860 1,226 (126) 2,333 937 1,345 (282) (119) (59) 52 1,396 638 758 362.2 208 208 Unaudited 2010 2009 2008 494 60 390 (532) 15 105 82 554 (1,595) (1,776) 126 (2,064) – (126) 288 758 (1,902) (1,947) 52 – – (7) (3,371) (1,144) Note: The above ﬁ nancial results have been translated into ZAR from US Dollars using the exchange rates as set out in accounting policies note 2.2.1. The year end rate was used for translating assets and liabilities and the average rate for translating income, expenditure and cash ﬂ ow items except for dividends which have been translated at the rate of exchange on the date of declaration. The translation was made solely for the convenience of the readers and is not deﬁ ned in IAS 21. It should be noted that the translated ZAR ﬁ gures from US Dollars do not necessarily represent that these US Dollar amounts could be converted into ZAR at the time when the transaction occurred. Group balance sheets in Rands convenience translation at September 2010 ZAR million Assets Non-current assets Property, plant and equipment Plantations Deferred tax assets Goodwill and intangible assets Joint ventures and associates Other non-current assets Financial instruments Current assets Inventories Trade and other receivables Financial instruments Cash and cash equivalents Total assets Equity and liabilities Shareholders’ equity Non-current liabilities Interest-bearing borrowings Deferred tax liabilities Financial instruments Other non-current liabilities Current liabilities Interest-bearing borrowings Overdraft Financial instruments Trade and other payables Taxation payable Provisions Total equity and liabilities 2010 annual report 93 Unaudited 2010 2009 32,659 25,690 4,822 372 190 877 575 133 36,070 29,156 4,528 415 237 912 748 74 17,765 18,010 5,868 6,233 105 5,559 5,870 6,359 74 5,707 50,424 54,080 13,308 22,804 16,263 2,709 – 3,832 14,312 4,850 35 21 8,921 253 232 13,296 27,140 20,203 2,631 178 4,128 13,644 4,454 141 104 8,271 415 259 50,424 54,080 Note: The above ﬁ nancial results have been translated into ZAR from US Dollars using the exchange rates as set out in accounting policies note 2.2.1. The year end rate was used for translating assets and liabilities and the average rate for translating income, expenditure and cash ﬂ ow items except for dividends which have been translated at the rate of exchange on the date of declaration. The translation was made solely for the convenience of the readers and is not deﬁ ned in IAS 21. It should be noted that the translated ZAR ﬁ gures from US Dollars do not necessarily represent that these US Dollar amounts could be converted into ZAR at the time when the transaction occurred. 94 Group cash ﬂ ow statements in Rands convenience translation for the year ended September 2010 ZAR million Cash retained from operating activities Cash generated from operations – (Increase) decrease in working capital Cash generated from operating activities – Finance costs paid – Finance revenue received – Taxation paid Cash available from operating activities – Dividends paid Cash utilised in investing activities Investment to maintain operations – Replacement of non-current assets – Proceeds on disposal of non-current assets – Decrease in other non-current assets Investment to expand operations – Additions of non-current assets – Acquisition Cash effects of ﬁ nancing activities Proceeds from interest-bearing borrowings* Repayment of interest-bearing borrowings* Rights issue proceeds Share issue costs Costs directly attributable to the bond offerings (Decrease) increase in bank overdrafts Net movement in cash and cash equivalents Cash and cash equivalents at beginning of year Translation effects Cash and cash equivalents at end of year Unaudited 2009 4,156 3,935 1,370 5,305 (964) 234 (45) 4,530 (374) (6,868) (1,289) (1,325) 18 18 (5,579) (261) (5,318) 6,374 31,268 (29,041) 5,183 (279) (703) (54) 3,662 2,213 (168) 5,707 2010 3,964 5,521 (37) 5,484 (1,543) 90 (67) 3,964 – (1,409) (1,124) (1,296) 157 15 (285) (285) – (1,917) 1,528 (3,326) – (22) – (97) 638 5,707 (786) 5,559 2008 2,638 4,586 7 4,593 (1,033) 97 (520) 3,137 (499) (3,669) (1,775) (1,857) 52 30 (1,894) (1,894) – 364 15,431 (15,097) – – – 30 (667) 2,501 379 2,213 * Includes gross cash ﬂ ows relating to ongoing short-term ﬁ nancing activities. Note: The above ﬁ nancial results have been translated into ZAR from US Dollars using the exchange rates as set out in accounting policies note 2.2.1. The year end rate was used for translating assets and liabilities and the average rate for translating income, expenditure and cash ﬂ ow items except for dividends which have been translated at the rate of exchange on the date of declaration. The translation was made solely for the convenience of the readers and is not deﬁ ned in IAS 21. It should be noted that the translated ZAR ﬁ gures from US Dollars do not necessarily represent that these US Dollar amounts could be converted into ZAR at the time when the transaction occurred. 2010 annual report 95 Notes to the group annual ﬁ nancial statements for the year ended September 2010 1. Business Sappi Limited, a corporation organised under the laws of the Republic of South Africa (the ‘company’ and, together with its consolidated subsidiaries, ‘Sappi’ or the ‘group’), was formed in 1936 and is a major, vertically integrated international pulp and paper producer. Sappi is a leading global producer of coated ﬁ ne paper and chemical cellulose. The group has manufacturing facilities in nine countries, on four continents, and customers in over 100 countries across the globe. industry, and are rounded to the nearest million except as otherwise indicated. The ﬁ nancial statements are prepared on the historical-cost basis, except as set out in the accounting policies below. Certain items, including derivatives are stated at their fair value while plantations and non-current assets held for sale are stated at fair value less cost to sell. (i) Fiscal year The group’s ﬁ nancial year end is on the Sunday closest to the last The group is comprised of Sappi Fine Paper North America, Sappi day of September. Fine Paper Europe and Sappi Southern Africa reportable segments. Sappi Fine Paper which comprises Sappi Fine Paper Europe and Accordingly, the last three ﬁ nancial years were as follows: Sappi Fine Paper North America, has manufacturing and marketing ■ 28 September 2009 to 26 September 2010 (52 weeks) facilities in North America, Europe and Asia and produces mainly ■ 29 September 2008 to 27 September 2009 (52 weeks) high quality branded coated fine paper. It also manufactures ■ 01 October 2007 to 28 September 2008 (52 weeks) uncoated graphic and business paper, coated and uncoated speciality paper, and casting release paper used in the manufacture of artiﬁ cial leather and textured polyurethane applications. Sappi Southern Africa (Sappi Paper and Paper Packaging, Sappi Forests and Sappi Chemical Cellulose) based in southern Africa, produces The group has disclosed two years’ comparative information for the income statement, statement of comprehensive income and the cash ﬂ ow statement to be consistent with its disclosure in the annual report prepared on form 20-F. commodity paper products, pulp, chemical cellulose, uncoated (ii) Underlying concepts fine paper and forest and timber products for southern Africa The ﬁ nancial statements are prepared on the going concern basis. and export markets. The group operates a trading network called Sappi Trading for the international marketing and distribution of Assets and liabilities and income and expenses are not offset in the income statement or balance sheet unless speciﬁ cally permitted chemical cellulose and market pulp throughout the world and by IFRS. of the group’s other products in areas outside its core operating regions of North America, Europe and southern Africa. The ﬁ nancial results and position associated with Sappi Trading are allocated to our reportable segments. 2. Accounting policies The following principal accounting policies have been consistently applied in dealing with items that are considered material in relation to the Sappi Limited group ﬁ nancial statements. 2.1 Basis of preparation Changes in accounting estimates are recognised prospectively in proﬁ t or loss, except to the extent that they give rise to changes in the carrying amount of recognised assets and liabilities where the change in estimate is recognised immediately. 2.2 Summary of accounting policies 2.2.1 Foreign currencies (i) Foreign currency transactions Transactions in foreign currencies are converted into the functional currency of the group’s individual operations at the rate of exchange The group’s consolidated ﬁ nancial statements have been prepared ruling at the date of such transactions. in accordance with: ■ International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB); Monetary and non-monetary assets and liabilities in foreign currencies are translated into the functional currency of the entities in the group at rates of exchange ruling at the reporting date. ■ Interpretations issued by the International Financial Reporting Exchange gains and losses on the translation and settlement of Interpretations Committee (IFRIC) of the IASB; foreign currency monetary assets and liabilities during the period ■ the AC 500 Standards issued by the Accounting Practices are recognised in the proﬁ t or loss in the period in which they arise. Board in South Africa; and ■ the requirements of the South African Companies Act of 1973. (ii) Consolidation of foreign operations The assets and liabilities, including goodwill of entities that have The ﬁ nancial statements are presented in United States Dollars non-dollar functional currencies are translated at the closing rate, (US$), as it is the major trading currency of the pulp and paper while the income and expenses are translated using the average 96 Notes to the group annual ﬁ nancial statements continued exchange rate. The differences that arise on translation are reported (ii) Initial measurement directly in other comprehensive income. These translation differences All ﬁ nancial instruments are initially recognised at fair value plus are recycled through proﬁ t or loss for the period on disposal of the transaction costs that are incremental to the group and directly foreign operation. The group used the following exchange rates for ﬁ nancial reporting purposes: Rate at ZAR to one US$ GBP to one US$ EUR to one US$ Sep 10 Sep 09 Sep 08 7.0190 0.6321 0.7412 7.4112 0.6268 0.6809 8.0751 0.5421 0.6843 Average annual rate Sep 10 Sep 09 Sep 08 ZAR to one US$ GBP to one US$ EUR to one US$ 7.4917 0.6406 0.7322 9.0135 0.6419 0.7322 7.4294 0.5049 0.6638 2.2.2 Group accounting (i) Subsidiary undertakings and special-purpose entities The group ﬁ nancial statements include the assets, liabilities and results of the company and subsidiary undertakings (including attributable to the acquisition or issue of the ﬁ nancial asset or ﬁ nancial liability except for those classiﬁ ed as ‘fair value through proﬁ t and loss’ where the transaction costs are recognised immediately in proﬁ t and loss. (iii) Subsequent measurement ■ Financial assets and ﬁ nancial liabilities at fair value through proﬁ t or loss Financial instruments at fair value through proﬁ t or loss consist of items classiﬁ ed as held for trading. The group has not designated any ﬁ nancial instruments as at fair value through proﬁ t or loss. ■ Non-trading ﬁ nancial liabilities All ﬁ nancial liabilities, other than those at fair value through proﬁ t or loss, are classiﬁ ed as non-trading ﬁ nancial liabilities and are measured at amortised cost. ■ Loans and receivables Loans and receivables are carried at amortised cost, with interest revenue recognised in proﬁ t and loss for the period using the effective interest method. special-purpose entities) controlled by the group. The results of ■ Available-for-sale ﬁ nancial assets subsidiary undertakings acquired or disposed of in the year are included in the consolidated income statements from the date of acquisition or up to the date of disposal or cessation of control. Available-for-sale ﬁ nancial assets are measured at fair value, with any gains and losses recognised directly in equity along with the associated deferred taxation. Any foreign currency translation gains or losses or interest revenue, measured on an effective-yield Intra-group balances and transactions, and proﬁ ts and losses basis, are recognised in proﬁ t or loss. arising from intra-group transactions, are eliminated in the preparation of the group ﬁ nancial statements. Unrealised losses are not eliminated to the extent that they provide objective evidence of impairment. (ii) Associates and joint ventures The results and assets and liabilities of associates and joint (iv) Embedded derivatives Certain derivatives embedded in ﬁ nancial and host contracts, are treated as separate derivatives and recognised on a stand-alone basis, when their risks and characteristics are not closely related to those of the host contract and the host contract is not carried at fair value, with unrealised gains and losses reported in proﬁ t or loss. ventures are incorporated in the group’s ﬁ nancial statements using (v) Derecognition the equity method of accounting. The share of the associate’s The group derecognises a ﬁ nancial asset when the rights to or joint venture’s retained income, which is the proﬁ t after tax, receive cash ﬂ ows from the asset have expired or have been is determined from their latest ﬁ nancial statements. The carrying transferred and the group has transferred substantially all risks and amount of such investments is reduced to recognise any impairment rewards of ownership. in the value of individual investments. 2.2.3 Financial instruments (i) Initial recognition A ﬁ nancial liability is derecognised when and only when the liability is extinguished, ie, when the obligation speciﬁ ed in the contract is discharged, cancelled or has expired. Financial instruments are recognised on the balance sheet when (vi) Impairment of ﬁ nancial assets the group becomes a party to the contractual provisions of a ■ Loans and receivables ﬁ nancial instrument. All purchases of ﬁ nancial assets that require An impairment loss is recognised in proﬁ t or loss when there is delivery within the time frame established by regulation or market evidence that the group will not be able to collect all amounts due convention (‘regular way’ purchases) are recognised at trade date. according to the original terms of the receivables. 2010 annual report 97 ■ Available-for-sale ﬁ nancial assets the minimum lease payments. Lease payments are allocated When there is objective evidence that an available-for-sale ﬁ nancial between capital repayments and ﬁ nance charges using the asset is impaired, the cumulative unrealised gains and losses effective interest rate method. previously recognised in equity are removed from equity and recognised in proﬁ t or loss even though the ﬁ nancial asset has not been derecognised. Capitalised leased assets are depreciated on a consistent basis as those with owned assets except where the transfer of ownership is uncertain at the end of the lease period in which case they are Impairment losses are only reversed in a subsequent period if the depreciated on a straight-line basis over the shorter of the lease fair value increases due to an objective event occurring since the period and the expected useful life of the asset. loss was recognised. (vii) Interest income and expense Interest income and expense are recognised in proﬁ t or loss using the effective interest rate method. 2.2.4 Government grants Government grants related to income are recognised in sundry income under Selling, general and administrative expenses. Government grants related to assets are recognised by deducting the grant from the carrying amount of the related asset. 2.2.5 Intangible assets (i) Research activities Expenditures on research activities and internally generated goodwill are recognised in proﬁ t or loss as an expense as incurred. (ii) Development activities Lease payments made under operating leases are charged to proﬁ t or loss on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern of the group’s beneﬁ t. (ii) Recognition of lease of land The land and buildings elements of a lease are considered separately for the purpose of lease classiﬁ cation. Where the building is a ﬁ nance lease and the lease payments cannot be allocated reliably between these two elements, the entire lease is classiﬁ ed as a ﬁ nance lease. 2.2.8 Non-current assets held for sale and discontinued operations Non-current assets (or disposal groups) are classiﬁ ed as held for sale when their carrying value will be recovered principally through Intangible assets are stated at cost less accumulated amortisation sale within 12 months rather than use. Non-current assets held for and impairment losses. Amortisation of engineering projects, sale are measured at the lower of carrying amount and fair value computer software and development costs is charged to proﬁ t or less cost to sell and are not depreciated. loss on a straight-line basis over the estimated useful lives of these assets, not exceeding ﬁ ve years. (iii) Patents Patents acquired are capitalised and amortised on a straight-line basis over their estimated useful lives, which is on average ten years. 2.2.6 Inventories Inventories are stated at the lower of cost or net realisable value. Cost includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Cost is determined on the following basis: ■ First in ﬁ rst out (FIFO): ﬁ nished goods 2.2.9 Segment reporting Sappi reports and discloses segment information on the basis of information that is reviewed by the chief operating decision maker to make decisions when allocating resources and to assess performance of the group’s operating segments. The operating segments of Sappi are; Sappi Fine Paper which is made up of operations in Europe and North America, and Sappi Southern Africa. Assets, liabilities, revenues or expenses that are not directly attributable to a particular segment are allocated between segments where there is a reasonable basis for doing so. The group accounts for inter-segment revenues and transfers as if the transactions were with third parties at current market prices. ■ Weighted average: raw materials, work in progress and consumable stores 2.2.10 Share-based payments (i) Equity-settled share-based payment transactions ■ The speciﬁ c identiﬁ cation basis is used to arrive at the cost of The services or goods received in an equity-settled share-based items that are not interchangeable. payment transaction with counterparties are measured at the fair 2.2.7 Leases (i) The group as lessee value of the equity instruments at grant date. If the equity instruments granted vest immediately and the beneﬁ ciary Finance leases are capitalised at the inception of the lease at the is not required to complete a speciﬁ ed period of service before lower of the fair value of the leased asset or the present value of becoming unconditionally entitled to those instruments, the beneﬁ t 98 Notes to the group annual ﬁ nancial statements continued received is recognised in proﬁ t or loss for the period in full on grant Shipping and handling costs, such as freight to our customers’ date with a corresponding increase in equity. Where the equity instruments do not vest until the beneﬁ ciary has completed a speciﬁ ed period of service, it is assumed that the beneﬁ t received by the group as consideration for those equity instruments, will be received in the future during the vesting period. These beneﬁ ts are accounted for in proﬁ t or loss as they are destination are included in cost of sales. These costs, when included in the sales price charged for our products are recognised in net sales. 2.2.13 Emission trading The group recognises grants when allocated by governments for emission rights as an intangible asset at a nominal amount with an received during the vesting period, with a corresponding increase equal liability at the time of the grant. in equity. Share-based payment expenses are adjusted for non- market-related performance conditions. (ii) Measurement of fair value of equity instruments granted The equity instruments granted by the group are measured at fair value at the measurement date using modiﬁ ed binomial option pricing valuation models. The valuation technique is consistent with generally acceptable valuation methodologies for pricing The group does not recognise a liability for emissions to the extent that it has sufﬁ cient allowances to satisfy emission liabilities incurred. Where there is a shortfall of allowances that the group would have to deliver for emissions, a liability is recognised at the current market value of the shortfall. Where the group sells allowances to parties outside the group at amounts greater than carrying value, a gain is recognised in proﬁ t ﬁ nancial instruments and incorporates all factors and assumptions or loss for the period. that knowledgeable, willing market participants would consider in setting the price of the equity instruments. (iii) Broad-based Black Economic Empowerment transaction 2.2.14 Alternative fuel mixture credits Up until 31 December 2009, the U.S. Internal Revenue Code allowed an excise tax credit for alternative fuel mixtures produced by a taxpayer for sale, or for use as a fuel in a taxpayer’s trade or The group accounts for the transaction in accordance with IFRS 2 business. and the fair value of the services rendered by employees in proﬁ t or loss as they are rendered during the service period. 2.2.11 Borrowing costs Borrowing costs directly attributable to the acquisition, construction and production of qualifying assets are capitalised as part of the costs of those assets. The group qualiﬁ ed for the alternative fuel mixtures tax credit through its North American operations because it used a bio-fuel known as black liquor, which is a by-product of its wood pulping process, to power its mills. The group recognises income for the alternative fuel mixture credits when its right to receive the credit is established. This occurs when Borrowing costs capitalised are calculated at the group’s average the group has complied with the requirements of the Internal funding cost, except to the extent that funds are borrowed Revenue Code and has submitted a claim for the credits due. This speciﬁ cally for the purpose of obtaining a qualifying asset. Where is recorded in proﬁ t and loss under other operating income. this occurs, actual borrowing costs incurred less any investment income on the temporary investment of those borrowings are capitalised. 2.2.12 Revenue Revenue is recognised when the signiﬁ cant risks and rewards of ownership have been transferred, when delivery has been made and title has passed, when the amount of the revenue and the related costs can be reliably measured and when it is probable that the debtor will pay for the goods. For the majority of local and The company considers the tax credits earned in ﬁ scal 2010 and ﬁ scal 2009 as fully taxable and have treated them as such in the calculation of its tax provision in the consolidated ﬁ nancial statements. 2.3 Critical accounting policies and estimates Management of the group makes estimates and assumptions concerning the future in applying its accounting policies. The estimates may not equal the related actual results. regional sales, transfer occurs at the point of ofﬂ oading the The group believes that the following accounting policies are critical shipment into the customer warehouse, whereas for the majority due to the degree of management judgement and estimation of export sales transfer occurs when the goods have been loaded required and/or the potential material impact they may have on the into the relevant carrier, unless the contract of sale speciﬁ es group’s ﬁ nancial position and performance. different terms. Revenue is measured at the fair value of the amount received or receivable which is arrived at after deducting trade and settlement 2.3.1 Impairment of assets other than goodwill and fi nancial instruments The group assesses all assets (other than goodwill and intangible discounts, rebates, and customer returns. assets not yet available for use) at each balance sheet date 2010 annual report 99 for indications of an impairment or the reversal of a previously the estimated cost of dismantling and removing the assets, where recognised impairment. Intangible assets not yet available for use are tested at least annually for impairment. In assessing assets for impairment, the group estimates the asset’s useful life, discounted future cash ﬂ ows, including appropriate bases for future product pricing in the appropriate markets, raw material and energy costs, volumes of product sold, the planned use of machinery or equipment or closing of facilities. The pre-tax specifically required in terms of legislative requirements or a constructive obligation exists, professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the group’s accounting policy. Expenditure incurred to replace a component of an item of owner- occupied property or equipment is capitalised to the cost of the item of owner-occupied property and equipment and the part replaced is derecognised. discount rate (impairment discount factor) is another sensitive input Depreciation which commences when the assets are ready for to the calculation. Where an impairment exists, the losses are recognised in proﬁ t or loss for the period. For an asset whose cash ﬂ ows are largely dependent on those of other assets, the recoverable amount is determined for the cash-generating unit (CGU) to which the asset belongs. A previously recognised impairment loss will be reversed through proﬁ t or loss if the recoverable amount increases as a result of a change in the estimates used previously to determine the recoverable amount, but not to an amount higher than the carrying amount that would have been determined, net of depreciation or amortisation, had no impairment loss been recognised in prior periods. Refer to note 9 for the assumptions and inputs used in assessing assets for impairment or impairment reversals. 2.3.2 Goodwill The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the group in exchange for control of the acquiree. The acquiree’s identiﬁ able their intended use, is charged to write off the depreciable amount of the assets, other than land, over their estimated useful lives to estimated residual values, using a method that reﬂ ects the pattern in which the asset’s future economic beneﬁ ts are expected to be consumed by the entity. Management judgement and assumptions are necessary in estimating the methods of depreciation, useful lives and residual values. The residual value for the majority of items of plant and equipment has been deemed to be zero by management due to the underlying nature of the equipment. The following methods and rates were used during the year to depreciate property, plant and equipment to estimated residual values: Buildings Plant Vehicles straight-line 40 years straight-line 5 to 20 years straight-line 5 to 10 years Furniture and equipment straight-line 3 to 6 years 2.3.4 Taxation Taxation on the proﬁ t or loss for the year comprises current and assets, liabilities and contingent liabilities that meet the conditions for deferred taxation. Taxation is recognised in proﬁ t or loss except to recognition are recognised at their fair value at the acquisition date. the extent that it relates to items recognised directly in other Goodwill arising at acquisition is subsequently held at cost less any accumulated impairment losses. Goodwill is not amortised but is comprehensive income, in which case, it is also recognised in other comprehensive income. tested for impairment annually or more frequently where there is an (i) Current taxation indication of impairment based on an allocation to one or more Current taxation is the expected taxation payable on the taxable CGUs in which the synergies from the business combinations are income, which is based on the results for the period after taking expected. Goodwill is tested for impairment using a cash flow valuation model based on an allocation of the goodwill to one or more into account necessary adjustments, using taxation rates enacted or substantively enacted at the balance sheet date, and any adjustment to taxation payable in respect of previous years. CGUs. The group takes into account its ability to carousel The group estimates its income taxes in each of the jurisdictions in products across different operating units in allocating goodwill which it operates. This process involves estimating its current tax to CGUs. 2.3.3 Property, plant and equipment Items of property, plant and equipment are stated at cost less liability together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Secondary Tax on Companies (STC) is a South African income tax, accumulated depreciation and impairment losses. Cost includes that arises from the distribution of dividends and is recognised in 100 Notes to the group annual ﬁ nancial statements continued proﬁ t or loss at the same time as the liability to pay the related Hedge accounting is discontinued on a prospective basis when dividend. (ii) Deferred taxation Deferred taxation is provided using the balance sheet liability method, based on temporary differences. The amount of deferred the hedge no longer meets the hedge accounting criteria (including when it becomes ineffective), when the hedging instrument is sold, terminated or exercised and for cash ﬂ ow hedges, the designation is revoked and the forecast transaction is no longer expected to taxation provided is based on the expected manner of realisation occur. Where a forecasted transaction is no longer expected to or settlement of the carrying amount of assets and liabilities using occur, the cumulative gain or loss deferred in equity is transferred taxation rates enacted or substantively enacted at the balance to proﬁ t or loss. sheet date. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable proﬁ t nor the accounting proﬁ t. Deferred taxation is charged The ﬁ nancial instruments that are used in hedging transactions are assessed both at inception and quarterly thereafter to ensure they are effective in offsetting changes in either the fair value or cash ﬂ ows of the related underlying exposures. Hedge ineffectiveness is to proﬁ t or loss for the period, except to the extent that it relates to recognised immediately in proﬁ t or loss. a transaction that is recognised directly in other comprehensive income, or a business combination that is an acquisition. Refer to note 29 for details of the fair value hedging relationships as well as the impact of the hedge on the pre-tax proﬁ t or loss for Before recognising a deferred tax asset the group assesses the the period. likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent recovery is not probable, a deferred tax asset is not recognised. In recognising deferred tax assets, the group considers proﬁ t forecasts, including the effect of exchange rate ﬂ uctuations on sales and external market conditions. 2.3.5 Derivatives and hedge accounting ■ Fair value hedges 2.3.6 Plantations Plantations are stated at fair value less estimated cost to sell at the harvesting stage. In arriving at plantation fair values, the key assumptions are estimated prices less cost of delivery, discount rates, and volume and growth estimations. All changes in fair value are recognised in the period in which they arise. If a fair value hedge meets the conditions for hedge accounting, The impact of changes in estimate prices, discount rates and, any gain or loss on the hedged item attributable to the hedged volume and growth assumptions may have on the calculated fair risk is included in the carrying amount of the hedged item and value and other key ﬁ nancial information on plantations are recognised in proﬁ t or loss. The changes in the fair value of the disclosed in note 10. hedging instrument and the hedged item is recognised in proﬁ t or loss. ■ Cash ﬂ ow hedges In relation to cash ﬂ ow hedges that meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument ■ Estimated prices less cost of delivery In periods prior to the third quarter of ﬁ scal 2010 the group used unadjusted current market prices to estimate the fair value of timber. that is determined to be an effective hedge is recognised directly In the third quarter of ﬁ scal 2010, the group revised this methodology in other comprehensive income and the ineffective portion is for all immature timber and mature timber that is to be felled in more recognised in proﬁ t or loss. The gains or losses, which are recognised directly in shareholders’ equity, are transferred to proﬁ t or loss in the same period in which the hedged transaction affects proﬁ t or loss. If the forecasted transaction results in the recognition on a non- ﬁ nancial asset or non-ﬁ nancial liability, the associated cumulative than 12 months from the reporting period to consider a 12 quarter rolling historical average price. This is considered a reasonable period of time taking into consideration the length of the growth cycle of the plantations. The new methodology also takes into consideration expected future price trends and recent market transactions involving comparable plantations. gain or loss is transferred from equity to the underlying asset or The group considers the new methodology to be preferable. liability on the transaction date. ■ Hedge of a net investment in a foreign operation The effective portion of the gain or loss on the hedging instrument Current market prices for timber are highly volatile for timber that is expected to be felled in more than 12 months from the reporting period. Therefore, the group considers the use of a rolling historical is recognised in other comprehensive income and is only reclassiﬁ ed average price coupled with consideration of expected future price to proﬁ t or loss on the disposal or partial disposal of the foreign trends and recent market transactions involving comparable operation. plantations to be a preferable methodology. 2010 annual report 101 Mature timber that is expected to be felled within 12 months from costs for managing the plantations are recognised as silviculture the reporting period continues to be valued using unadjusted costs in cost of sales (see note 4.1). current market prices. Such timber is expected to be used in the short term and consequently, current market prices are considered an appropriate reﬂ ection of fair value. 2.3.7 Pension plans and other post-retirement benefi ts Deﬁ ned-beneﬁ t and deﬁ ned-contribution plans have been established The fair value is derived by using the prices as explained above for eligible employees of the group, with the assets held in reduced by the estimated cost of delivery. Cost of delivery includes separate trustee-administered funds. all costs associated with getting the harvested plantations to the market, being harvesting, loading, transport and allocated ﬁ xed overheads. ■ Discount rate The discount rate used is the applicable pre-tax weighted average cost of capital of the business unit. ■ Volume and growth estimations and cost assumptions The group focuses on good husbandry techniques which include The present value of the deﬁ ned beneﬁ t obligations and related current service costs are calculated annually by independent actuaries using the projected unit method. These actuarial models use an attribution approach that generally spread individual events over the service lives of the employees in the plan. Examples of “events” are changes in actuarial assumptions such as discount rate, expected long-term rate of return on plan assets, and rate of compensation increases. ensuring that the rotation of plantations is met with adequate Estimates and assumptions used in the actuarial models include planting activities for future harvesting. The age threshold used for the discount rate, return on assets, salary increases, healthcare quantifying immature timber is dependent on the rotation period cost trends, longevity and service lives of employees. of the speciﬁ c timber genus which varies from between eight to eighteen years. In the southern African region, softwood less than eight years and hardwood less than five years is classified as immature timber. The group’s policy is to recognise actuarial gains and losses, which can arise from differences between expected and actual outcomes or changes in actuarial assumptions, in other comprehensive income. Any increase in the present value of plan liabilities expected Trees are generally felled at the optimum age when ready for to arise due to current service costs is charged to operating proﬁ t. intended use. At the time the tree is felled it is taken out of plantations and accounted for under inventory and reported as depletion cost (fellings). Depletion costs include the fair value of timber felled, which is determined on the average method, plus amounts written off against standing timber to cover loss or damage caused by ﬁ re, disease and stunted growth. These costs are accounted for on a cost per metric ton allocation method multiplied by unadjusted current market prices. Tons are calculated using the projected growth to rotation age and are extrapolated to current age on a straight-line basis. The group has projected growth estimation over a period of eight to 18 years per rotation. In deriving this estimate, the group Gains or losses on the curtailment or settlement of a deﬁ ned beneﬁ t plan are recognised in proﬁ t or loss when the group is demonstrably committed to the curtailment or settlement. Past service costs are recognised immediately to the extent that the beneﬁ ts are already vested, and otherwise are amortised on a straight-line basis over the vesting period of those beneﬁ ts. The net liability recognised in the balance sheet represents the present value of the defined benefit obligation adjusted for unrecognised past service costs, reduced by the fair value of the plan assets. Where the calculation results in a beneﬁ t to the group, the recognised asset is limited to the net total of past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan. established a long-term sample plot network which is representative Refer to note 27 for the key estimates, assumptions and other of the species and sites on which trees are grown and the information on post-employment beneﬁ ts applicable as at the end measured data from these permanent sample plots were used as of September 2010. input into the group’s growth estimation. Periodic adjustments are made to existing models for new genetic material. 2.3.8 Provisions Provisions are recognised when the group has a legal or constructive The group directly manages plantations established on land that obligation arising from past events that will probably be settled. is either owned or leased from third parties. Indirectly managed Where the effect of discounting (time value) is material, provisions plantations represent plantations established on land held by are discounted and the discount rate used is a pre-taxation rate independent commercial farmers where Sappi provides technical that reﬂ ects current market assessments of the time value of advice on the growing and tendering of trees. The associated money and, where appropriate, the risks speciﬁ c to the liability. 102 Notes to the group annual ﬁ nancial statements continued The establishment and review of the provisions requires signiﬁ cant two comparative periods for the affected notes. Due to the fact judgement by management as to whether or not there is a probable that no changes were made to the ﬁ scal 2008 and 2009 balance obligation and as to whether or not a reliable estimate can be sheets, only one comparative period has been disclosed for the made of the amount of the obligation. balance sheet. Environmental accruals are recorded based on current interpretation of environmental laws and regulations. 2.4 Adoption of accounting standards in the current year The following standards, interpretations and signiﬁ cant amendments or revisions to standards have been adopted by the group in the current year: 2.5 Accounting standards, interpretations and amendments to existing standards that are not yet effective The group has not yet adopted certain new standards, amendments and interpretations to existing standards, which have been published but are only effective for our accounting periods beginning on or after October 2010 or later periods. These new standards, and their effective dates for the group’s annual accounting periods IFRS 8 Operating Segments are listed below: IFRS 8 requires an entity to report ﬁ nancial and descriptive information about its reportable segments. Reportable segments are components of an entity for which separate ﬁ nancial information is available that is evaluated regularly by the chief operating ■ IFRS 9 Financial Instruments IFRS 9 introduces new requirements for classifying and measuring ﬁ nancial assets. The group is currently evaluating the impact that the adoption of this IFRS will have on its consolidated decision maker in deciding how to allocate resources and assessing ﬁ nancial statements. performance. Amendment, revisions or issues of the following standards or The adoption of IFRS 8 “Operating Segments” did not have an interpretations which will only become mandatory for the group’s impact on the group’s reported results or ﬁ nancial position. consolidated ﬁ nancial statements on the dates indicated are not Amendment to IFRS 7 Financial Instruments: Disclosures expected to have a material impact on the group’s results or ﬁ nancial position: IFRS 7 was amended to require enhanced disclosures about fair ■  IFRS 2 Share-based Payment value measurements. The group has in note 29, disclosed the level Amendments relating to group cash-settled share-based in the fair value hierarchy into which the fair value measurements payment transactions (September 2011) are categorised for ﬁ nancial instruments that are measured at fair ■ IFRS 7 Financial Instruments: Disclosures. value in the statement of ﬁ nancial position. Transfers of ﬁ nancial assets (September 2012) The adoption of this amendment did not have an impact on the ■ IAS 24 Related Party Disclosures group’s reported results or ﬁ nancial position. Revised deﬁ nition of related parties (September 2012) Other amendments to IFRS ■ IAS 32 Financial Instruments: Presentation The group adopted IFRIC 15, IFRIC 17, IFRIC 18, revision to Amendments relating to classiﬁ cation of rights issues IFRS 3, amendments to IAS 27, IAS 28, IAS 31, IFRS 2, IAS 39, (September 2011) ■ IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (September 2011) ■ Various improvements to IFRSs IFRIC 9 and various improvements to IFRSs in ﬁ scal 2010. The adoption of these new or revised standards, interpretations, amendments and improvements to standards did not have a material impact on the group’s reported results or ﬁ nancial position. Presentation of comparative information on adoption of IFRS on a retrospective basis With the adoption of IFRS 8 and the group’s change in its internal organisation structure, the group made retrospective adjustments to segment reporting per note 3 to the ﬁ nancial statements. The group also had other adjustments to notes 20, 24 and 25 to the ﬁ nancial statements. These adjustments only impacted the notes to the ﬁ nancial statements and therefore the group has disclosed 2010 annual report 103 3. Segment information Sappi adopted IFRS 8 “Operating Segments” in ﬁ scal 2010. The adoption of this standard did not have an impact on the group’s reported results, ﬁ nancial position or cash ﬂ ows. IFRS 8 requires an entity to report ﬁ nancial and descriptive information about its reportable segments. The group’s reportable segments are North America, Europe and Sappi Southern Africa. Reportable segments are components of an entity for which separate ﬁ nancial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. Prior year segment disclosure has been revised as reﬂ ected below. Sappi reports and discloses segment information on the basis of information that is reviewed by the chief operating decision maker to make decisions when allocating resources and to assess performance of the group’s reportable segments. Information reported to the chief operating decision maker for the purpose of resource allocation and assessment of segment performance is focused on a geographical region. The group accounts for intra-group sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. All such sales and transfers are eliminated on consolidation. The group operates a trading network called Sappi Trading for the international marketing and distribution of chemical cellulose and market pulp throughout the world and of the group’s other products in areas outside its core operating regions of North America, Europe and southern Africa. The ﬁ nancial results and position associated with Sappi Trading are allocated to our reportable segments. Revised segmental reporting disclosure Prior to the adoption of IFRS 8, the Sappi Fine Paper segment included the group’s ﬁ ne paper operations in Southern Africa. Sappi has since changed the structure of its internal organisation in a manner that has caused the composition of its reportable segments to change such that Sappi Fine Paper South Africa is now reported as part of the Sappi Southern African segment in accordance with the geographical management of our business. The table below shows the effect of this change for the ﬁ nancial years ended September 2009 and 2008 respectively: Sappi Southern Africa* US$ million 2009 2008 2009 2008 2009 2008 As previously reported Adjustment Revised segmental reporting Income statement External sales(1) Inter-segment sales Total sales Segment operating (loss) proﬁ t Other non-cash items (including fair 861 532 1,393 (52) 1,099 657 1,756 273 318 32 350 (3) 380 41 421 6 1,179 564 1,743 (55) 1,479 698 2,177 279 value adjustment on plantations) 2 (150) 2 3 4 (147) Balance sheet Capital expenditures Total assets Segment assets(2) Property, plant and equipment 60 2,002 1,686 1,078 290 2,049 1,721 1,008 11 260 205 118 9 168 110 111 71 2,262 1,891 1,196 299 2,217 1,831 1,119 * Sappi Forest Products has been renamed to Sappi Southern Africa. 104 Notes to the group annual ﬁ nancial statements continued 3. Segment information (continued) The information below is presented in the way that it is reviewed by the chief operating decision maker as required by IFRS 8 “Operating Segments”: Sappi Fine Paper North America Europe US$ million 2010 2009 2008 2010 2009 2008 Income statement External sales(1) Inter-segment sales Total sales Operating proﬁ t excluding special items Special items – (gains) losses(2) Segment operating proﬁ t (loss) EBITDA excluding special items(2) Share of proﬁ t of equity investments Depreciation and amortisation Asset (impairment reversals) impairments Other non-cash items (including fair value adjustment on plantations) Balance sheet Capital expenditures Segment assets(2) Total assets Property, plant and equipment 1,373 252 1,295 179 1,664 244 3,638 476 2,895 267 2,720 392 1,625 1,474 1,908 4,114 3,162 3,112 124 (56) 180 201 – 77 (2) 8 (2) (55) 53 98 – 100 – 48 95 3 92 201 1 106 4 17 76 4 72 310 1 234 (10) 8 12 79 (67) 226 3 214 74 86 55 119 (64) 235 1 180 78 131 42 935 1,100 777 31 981 1,160 810 125 1,087 1,290 879 100 2,109 2,917 1,663 82 2,340 3,080 1,928 82 1,758 2,266 1,363 Reconciliation of operating proﬁ t (loss) excluding special items to segment operating proﬁ t (loss): Sappi Fine Paper North America Europe US$ million 2010 2009 2008 2010 2009 2008 Operating proﬁ t (loss) excluding special items Special items – (gains) losses(2) Segment operating proﬁ t (loss) 124 (56) 180 (2) (55) 53 95 3 92 76 4 72 12 79 (67) 55 119 (64) 2010 annual report 105 Sappi Southern Africa Unallocated and eliminations(3) Group 2010 2009 2008 2010 2009 2008 2010 2009 2008 1,561 714 1,179 564 1,479 698 – – – 6,572 5,369 5,863 (1,442) (1,010) (1,334) – – – 2,275 1,743 2,177 (1,442) (1,010) (1,334) 6,572 5,369 5,863 134 22 112 236 4 102 2 (39) 18 72 (54) 101 4 83 5 4 64 1,887 2,376 1,220 71 1,891 2,262 1,196 209 (70) 279 296 5 87 37 (147) 299 1,831 2,217 1,119 5 28 (23) 5 8 – – 8 – 65 791 – 5 10 (5) 6 4 1 – 7 – 7 8 10 1 – (38) (58) 339 (2) 341 752 13 413 (10) (15) 33 106 (73) 431 11 398 366 52 314 740 17 374 79 119 100 (57) – 38 795 – 1 39 336 – 206 4,996 7,184 3,660 184 5,250 7,297 3,934 507 4,715 6,109 3,361 Sappi Southern Africa Unallocated and eliminations(3) Group 2010 2009 2008 2010 2009 2008 2010 2009 2008 134 22 112 18 72 (54) 209 (70) 279 5 28 (23) 5 10 (5) 7 – 7 339 (2) 341 33 106 (73) 366 52 314 106 Notes to the group annual ﬁ nancial statements continued 3. Segment information (continued) Reconciliation of EBITDA excluding special items and operating proﬁ t (loss) excluding special items to proﬁ t (loss) before taxation: US$ million 2010 2009 2008 2010 2009 2008 Sappi Fine Paper North America Europe 201 77 124 (56) 180 98 100 (2) (55) 53 201 106 95 3 92 310 234 76 4 72 226 214 12 79 (67) 235 180 55 119 (64) EBITDA excluding special items(2) Depreciation and amortisation Operating proﬁ t (loss) excluding special items Special items – (gains) losses Segment operating proﬁ t (loss) Net ﬁ nance costs Proﬁ t (loss) before taxation Reconciliation of segment assets to total assets: Sappi Fine Paper North America Europe US$ million 2010 2009 2008 2010 2009 2008 Segment assets(2)(3) Deferred taxation asset Cash and cash equivalents Derivative ﬁ nancial instruments Trade and other payables Provisions Taxation payable Total assets 935 981 1,087 2,109 2,340 1,758 – 7 – 155 1 2 – 14 – 151 14 – – 5 – 198 – – 53 8 – 722 15 10 56 16 – 633 19 16 39 1 – 411 42 15 1,100 1,160 1,290 2,917 3,080 2,266 (1) Sales where the product is manufactured. (2) Refer to pages 189 to 191, Glossary for the deﬁ nition of the terms. (3) Includes the group’s treasury operations, the self-insurance captive and the investment in the Jiangxi Chenming joint venture. 2010 annual report 107 Sappi Southern Africa Unallocated and eliminations(3) Group 2010 2009 2008 2010 2009 2008 2010 2009 2008 236 102 134 22 112 101 83 18 72 (54) 296 87 209 (70) 279 5 – 5 28 (23) 6 1 5 10 (5) 8 1 7 – 7 752 413 339 (2) 341 255 86 431 398 33 106 (73) 145 (218) 740 374 366 52 314 126 188 Sappi Southern Africa Unallocated and eliminations(3) Group 2010 2009 2008 2010 2009 2008 2010 2009 2008 1,887 1,891 1,831 – 129 1 339 14 6 – 86 – 275 2 8 – 78 – 297 – 11 65 – 648 2 55 3 18 38 – 654 14 57 – 32 39 2 190 24 53 – 28 4,996 5,250 4,715 53 792 3 56 770 14 1,271 1,116 33 36 35 56 41 274 24 959 42 54 2,376 2,262 2,217 791 795 336 7,184 7,297 6,109 108 Notes to the group annual ﬁ nancial statements continued US$ million 4.1 Operating profi t Operating proﬁ t has been arrived at after charging (crediting): Raw materials, energy and other direct input costs Wood (includes felling adjustment(1)) Energy Chemicals Pulp Other variable costs Fair value adjustment on plantations(1) Growth Price Employment costs Depreciation Delivery charges Maintenance Other overheads Marketing and selling expenses Administrative and general expenses 2010 2009 2008 Selling, general and admini- strative expenses Selling, general and admini- strative expenses Cost of sales Selling, general and admini- strative expenses Cost of sales Cost of sales 3,570 706 626 1,050 929 259 (67) (31) 968 388 547 275 136 – – 5,786 – – – – – – – – 208 23 – – – 112 105 448 2,868 663 584 868 543 210 (73) 67 882 376 454 250 205 – – 5,029 – – – – – – – – 164 20 – – – 102 99 385 3,073 722 558 935 702 156 (70) (120) 864 350 509 252 158 – – 5,016 – – – – – – – – 153 24 – – – 105 103 385 US$ million 2010 2009 2008 Fair value adjustment on plantations(1) Changes in volumes Fellings Growth Plantation price fair value adjustment 71 (67) 4 (31) (27) 69 (73) (4) 67 63 80 (70) 10 (120) (110) 2010 annual report 109 US$ million 2010 2009 2008 4.1 Operating profi t (continued) Silviculture costs (included within cost of sales) Leasing charges for premises Leasing charges for plant and equipment Remuneration paid other than to employees of the company in respect of: – technical services – administration services Auditors’ remuneration: – audit and related services – tax planning and tax advice – acquisition and reﬁ nancing related services* Government grants towards environmental expenditure Research and development costs Amortisation Cost on derecognition of loans and receivables** Directors’ remuneration – executive directors – salaries and beneﬁ ts – non-executive directors – fees 4.2 Employment costs Wages and salaries Deﬁ ned-contribution plan expense (refer to note 27) Pension costs (refer to note 27) Post-employment beneﬁ ts other than pension expense (refer to note 27) Share-based payment expense Other 4.3 Other operating expenses (income) Included in other operating expenses are the following: Asset (impairment reversals) impairments Proﬁ t on sale and write-off of property, plant and equipment Restructuring provisions raised (released) and closure costs Alternative fuel mixture credits Broad-based Black Economic Empowerment transaction charge (refer to note 28) – Unwinding of the 2006 Black Economic Empowerment transaction – IFRS 2 costs on management and employee share option plans 67 14 48 31 12 19 8 7 1 – – 25 3 14 1 1 1,054 42 15 14 13 38 1,176 (10) (5) 46 (51) 23 19 4 50 16 15 27 11 16 8 6 1 1 (2) 31 2 16 2 1 936 33 21 10 9 37 50 16 32 33 15 18 10 6 1 3 (1) 34 – 22 2 1 921 23 9 14 10 40 1,046 1,017 79 (1) 34 (87) – – – 119 (5) 41 – – – – * These costs have been capitalised. ** The cost on derecognition of trade receivables relates to the derecognition of trade receivables related to the securitisation programme in South Africa and to the sale of letters of credit in Hong Kong. 110 Notes to the group annual ﬁ nancial statements continued US$ million 2010 2009 2008 5. Net ﬁ nance costs Gross interest and other ﬁ nance costs on liabilities carried at amortised cost – Interest on bank overdrafts – Interest on redeemable bonds and other loans – Interest cost on ﬁ nance lease obligations Finance revenue received on assets carried at amortised cost – Interest on bank accounts – Discount on early redemption of redeemable bonds and other loans – Interest revenue on other loans and investments Interest capitalised to property, plant and equipment Net foreign exchange gains Net fair value (gain) loss on ﬁ nancial instruments – Realised loss on termination of interest rate swaps – (Gain) loss on non-hedged swaps and loans – Amortisation of (gain) cost of de-designated hedges – Hedge ineffectiveness • gain on hedging instrument (derivative) • loss on hedged item 309 1 303 5 (16) (6) (5) (5) – (17) (21) – – (21) – – 198 6 190 2 (61) (16) (41) (4) – (17) 25 18 (2) – (41) 50 181 4 174 3 (38) (22) – (16) (16) (8) 7 – 2 5 (30) 30 255 145 126 US$ million 2010 2009 2008 6. Taxation charge (beneﬁ t) Current taxation: – Current year – Prior year over provision – Other company taxes* Deferred taxation: (refer to note 11) – Current year – Prior year under provision – Attributable to tax rate changes * Includes Secondary Tax on Companies (STC)(1) 10 (20) 4 26 – – 20 – 6 (7) 4 (44) 3 (3) (41) 4 23 (19) 2 89 – (9) 86 7 (1) The imposition of Secondary Tax on Companies (STC) effectively means that a dual corporate taxation system exists in South Africa comprising of normal income taxation and STC. Liability for STC is determined independently from normal income taxation and is paid by South African companies at the ﬂ at rate of 10% in respect of the amount of dividends declared less all dividends which accrued to them (but subject to certain exclusions) during its relevant “dividend cycle”. “Dividend cycle” means the period commencing on the day following the date of accrual to a company’s shareholders of the last dividend declared by that company and ending on the date on which the dividend in question accrues to the shareholder concerned. An excess of dividends accruing to a company over dividends paid may be carried forward to subsequent dividend cycles as an STC credit. In addition to income taxation charges (beneﬁ ts) to proﬁ t and loss, deferred tax relief of US$11 million (2009: US$32 million relief; 2008: US$1 million charge) has been recognised directly in other comprehensive income (refer to note 11). 2010 annual report 111 US$ million 2010 2009 2008 6. Taxation charge (beneﬁ t) (continued) Reconciliation of the tax rate Proﬁ t (loss) before taxation Proﬁ t-making regions Loss-making regions Taxation at the average statutory tax rate Proﬁ t-making regions at 30% (2009: 28%; 2008: 30%) Loss-making regions at 26% (2009: 28%; 2008: 26%) Net exempt income and non-tax deductible expenditure Effect of tax rate changes Deferred tax asset not recognised Utilisation of previously unrecognised tax assets Secondary Tax on Companies (STC) Prior year adjustments Other taxes Taxation charge (beneﬁ t) Effective tax rate for the year 86 307 (221) 35 92 (57) (10) – 65 (54) – (20) 4 20 (218) 133 (351) (60) 38 (98) (32) (3) 72 (22) 4 (4) 4 (41) 23% 19% 188 560 (372) 72 167 (95) (51) (9) 103 (19) 7 (19) 2 86 46% Our effective tax rate reﬂ ects the beneﬁ ts from reduced tax rates in South Africa (2010: nil; 2009: nil; 2008: US$9 million) and Germany (2010: nil; 2009: US$3 million; 2008: nil). The corporate tax rate in South Africa was reduced from 29% to 28% in 2008. The corporate tax rate (including trade tax) in Germany was reduced from 30% to 28.6% in 2009. 112 Notes to the group annual ﬁ nancial statements continued 7. Earnings (loss) per share and headline earnings (loss) per share Basic earnings (loss) per share (EPS) EPS is based on the group’s proﬁ t (loss) for the year divided by the weighted average number of shares in issue during the year under review. 2010 2009(1) 2008 Proﬁ t US$ million Shares millions Earnings per share US cents Loss US$ million Shares millions Loss per share US cents Proﬁ t US$ million Shares millions Earnings per share US cents Basic EPS calculation 66 516.7 13 (177) 482.6 (37) 102 362.2 28 Share options and performance shares under Sappi Limited Share Trust Share options granted under the Broad-based Black Economic – 3.9 – – – – – 3.6 – Empowerment transaction – 0.2 – – – – – – Diluted EPS calculation 66 520.8 13 (177) 482.6 (37) 102 365.8 – 28 (1) In the 2009 ﬁ nancial year, Sappi conducted a renounceable rights offer of 286,886,270 new ordinary shares of ZAR1.00 each to qualifying Sappi shareholders. In accordance with IAS 33, the ﬁ scal 2008 basic, headline and diluted earnings per share have been restated to take into account the bonus element of the rights offer. As such, the 2008 weighted average number of shares has been adjusted by a factor of 1.58 (the adjustment factor). The adjustment factor was calculated using the pre-announcement share price divided by the theoretical ex-rights price (TERP). TERP is the [(Number of new shares multiplied by the Subscription price) plus the (Number of shares held multiplied by the Ex-dividend share price)] all divided by the (Number of new shares plus the number of shares held prior to the rights offer). The diluted EPS calculations are based on Sappi Limited’s daily average share price of ZAR31.86 (2009: ZAR30.12; 2008: ZAR94.08) and exclude the effect of certain share options granted under the Sappi Share Incentive Scheme as well as share options granted under the Broad-based Black Economic Empowerment transaction as they would be anti-dilutive. There are 10.6 million (September 2009: 15.6 million; September 2008: 2.3 million) share options that could potentially dilute EPS in the future that are not included in the diluted weighted average number of shares calculation as they are anti-dilutive. 2010 annual report 113 7. Earnings (loss) per share and headline earnings (loss) per share (continued) Headline earnings per share(1) Headline earnings per share is based on the group’s headline earnings divided by the weighted average number of shares in issue during the year. This is a JSE Limited listings required measure. Reconciliation between attributable earnings (loss) to ordinary shareholders and headline earnings (loss): 2010 2009 2008 Gross Tax Net Gross Tax Net Gross Tax Net Attributable earnings (loss) to ordinary shareholders 86 20 66 (218) (41) (177) 188 86 102 Proﬁ t on sale and write-off of property, plant and equipment (4) – (4) (1) – (1) (5) – (5) (Impairment reversals) impairment of plant and equipment (10) – (10) 79 – 79 119 – 119 Headline earnings (loss) 72 20 52 (140) (41) (99) 302 86 216 Basic weighted average number of ordinary shares in issue (millions) Headline earnings (loss) per share (US cents) Diluted weighted average number of shares (millions) Diluted headline earnings (loss) per share (US cents) 516.7 10 520.8 10 482.6 (21) 482.6 (21) 362.2 60 365.8 59 (1) Headline earnings – as deﬁ ned in circular 3/2009 issued by the South African Institute of Chartered Accountants, separates from earnings all separately identiﬁ able remeasurements. It is not necessarily a measure of sustainable earnings. US$ million 2010 2009 2008 8. Dividends Dividend paid: (2009: 16 US cents per share; 2008: 32 US cents per share), net of dividends attributable to treasury shares – (37) (73) The board decided not to declare a dividend in respect of the 2010 ﬁ nancial year. 114 Notes to the group annual ﬁ nancial statements continued US$ million 2010 2009 9. Property, plant and equipment Land and buildings At cost Accumulated depreciation and impairments Plant and equipment* At cost Accumulated depreciation and impairments Capitalised leased assets** At cost Accumulated depreciation and impairments Aggregate cost Aggregate accumulated depreciation and impairments Aggregate book value 1,628 875 753 7,742 4,992 2,750 741 584 157 1,686 887 799 7,863 4,914 2,949 795 609 186 10,111 6,451 10,344 6,410 3,660 3,934 * Plant and equipment includes vehicles and furniture, the book value of which does not warrant disclosure as a separate class of assets. ** Capitalised leased assets consist primarily of plant and equipment. The movement of property, plant and equipment is reconciled as follows: US$ million Net book value at September 2008 Additions Acquisition Disposals Transfers Depreciation Impairments Translation differences Net book value at September 2009 Additions Acquisition Disposals Transfers Depreciation Impairment reversals Translation differences Land and buildings Plant and equipment Capitalised leased assets Total 612 33 169 (3) – (37) – 25 799 23 8 (13) – (41) – (23) 2,608 141 3,361 150 508 – 11 (339) (79) 90 2,949 183 5 (3) 5 (350) 20 (59) 1 73 (1) (11) (20) – 3 184 750 (4) – (396) (79) 118 186 3,934 – – – (5) (20) – (4) 206 13 (16) – (411) 20 (86) Net book value at September 2010 753 2,750 157 3,660 Details of land and buildings are available at the registered ofﬁ ces of the respective companies who own the assets (refer note 24 for details of encumbrances). 2010 annual report 115 9. Property, plant and equipment (continued) Asset impairments September 2010 Asset impairments and impairment reversals mainly comprise of: European mechanical coated cash-generating unit: Kangas Mill The coated mechanical cash-generating unit was previously impaired in September 2009 for US$74 million. On 12 January 2010, Sappi ceased operations at Kangas Mill which formed part of the mechanical coated cash-generating unit. Following the closure of the mill, the recoverable amount of the remaining assets in the coated mechanical CGU were reassessed resulting in an impairment reversal of US$18 million. Usutu Mill – Closure and transfers from assets held for sale At the end of January 2010, Usutu Mill ceased operations. The property, plant and equipment related to the mill had been substantially impaired in previous years and was impaired by a further US$2 million in the current ﬁ scal year. The Usutu pulp mill was permanently closed at the end of January 2010. The future of the site and plantations was discussed with potential investors and the government of Swaziland. The disposal group consisting mainly of plantations had been classiﬁ ed as held for sale since December 2009. The Sappi board subsequently took a decision to continue with its forestry operations in Swaziland, and is investigating the establishment of various timber processing operations at the Usutu Mill site. As a result, the assets are no longer classiﬁ ed as held for sale. Adamas Mill There were indicators of potential impairment to the Adamas Mill cash-generating unit. The group assessed this CGU for impairment and concluded that no impairment existed at September 2010. The recoverable amount was determined on the basis of value in use. The headroom in this calculation was calculated to be US$2 million using a pre-tax real discount rate of 9.48%. The calculation of the recoverable amount is sensitive to general market conditions, particularly the foreign currency exchange rate. The carrying amount of the CGU at the end of ﬁ scal 2010 was US$23 million. September 2009 Usutu Mill Usutu Mill is an unbleached pulp mill and forms part of the Sappi Forest Products reporting segment. In 2008, forest ﬁ res caused by severe weather conditions resulted in the loss of approximately 28% of the mill’s ﬁ bre supply and 40% of its plantations, resulting in insufﬁ cient ﬁ bre for the mill to continue operating in the long term under its existing regime. An impairment loss of US$37 million was recognised in 2008 and subsequent capital expenditure of US$5 million, incurred in 2009, has been impaired. The recoverable amount of the various assets has been determined on the basis of value in use. The value in use was established using a pre-tax real discount rate of 10.92%. Muskegon Mill On 26 August 2009, Sappi announced that it would permanently cease operations at its coated ﬁ ne paper mill in Muskegon, Michigan, North America. The property, plant and equipment at the mill had already been fully impaired in prior years. European mechanical coated cash-generating unit The mechanical coated cash-generating unit forms part of the Sappi Fine Paper segment. Due to the downturn in the market, the net present value of the future cash ﬂ ows of the cash-generating unit was lower than its carrying amount. As a result, a non-cash impairment charge of US$74 million has been recognised. The recoverable amount of the various assets within the cash-generating unit has been determined on the basis of value in use. The value in use was established using a pre-tax real discount rate of 7.22%. 116 Notes to the group annual ﬁ nancial statements continued US$ million 2010 2009 10. Plantations Fair value of plantations at beginning of year Gains arising from growth Fire, hazardous weather and other damages Additions Gain (loss) arising from fair value price changes* Harvesting – agriculture produce (fellings) Translation difference Fair value of plantations at end of year 611 67 – 9 31 (71) 40 687 631 73 (2) 1 (67) (69) 44 611 * In the third quarter of ﬁ scal 2010, the group changed the accounting estimate used to derive the estimated price of timber that is used to calculate the fair value of its plantations. The change is explained in more detail in section 2.3 – Critical accounting policies and estimates on valuing plantations. The impact of the change as at the third quarter of ﬁ scal 2010 was an increase in the fair value of plantations of US$28 million. Sappi manages the establishment, maintenance and harvesting of its plantations on a compartmentalised basis. These plantations are comprised of pulpwood and sawlogs and are managed in such a way so as to ensure that the optimum ﬁ bre balance is supplied to its paper and pulping operations in southern Africa. As Sappi manages its plantations on a rotational basis, the respective increases by means of growth are negated by depletions over the rotation period for the group’s own production or sales. Estimated volume changes on a rotational basis amount to approximately ﬁ ve million tons per annum. We own plantations on land that we own, as well as on land that we lease. We disclose both of these as directly managed plantations. With regard to indirectly managed plantations, Sappi has several different types of agreements with many independent farmers. The agreements depend on the type and speciﬁ c needs of the farmer and the areas planted. These agreements range in time from one to more than 20 years. In certain circumstances we provide loans to farmers, which are disclosed as accounts receivable in the group balance sheet (these loans are considered immaterial to the group). If Sappi provides seedlings, silviculture and/or technical assistance, the costs are expensed when incurred by the group. The group is exposed to ﬁ nancial risks arising from climatic changes, disease and other natural risks such as ﬁ re, ﬂ ooding and storms and human-induced losses arising from strikes, civil commotion and malicious damage. These risks are covered by an appropriate level of insurance as determined by management. The plantations have an integrated management system that is certiﬁ ed to ISO 9001, ISO 14001, OHSAS 18001 and FSC standards. Changes in estimate prices, the discount rate, costs to sell and, volume and growth assumptions applied in the valuation of immature timber may impact the calculated fair value as tabled below: US$ million Market price changes 1% increase in market prices 1% decrease in market prices Discount rate (for immature timber) 1% increase in rate 1% decrease in rate Volume assumption 1% increase in estimate of volume 1% decrease in estimate of volume Costs to sell 1% increase in costs to sell 1% decrease in costs to sell Growth assumptions 1% increase in rate of growth 1% decrease in rate of growth 2010 2009 2008 2 (2) (5) 5 9 (9) (1) 1 2 (2) 12 (12) (3) 3 6 (6) (9) 9 1 (1) 17 (17) (4) 4 6 (6) (10) 10 1 (1) 2010 annual report 117 US$ million Assets Liabilities Assets Liabilities 2010 2009 11. Deferred tax Other liabilities, accruals and prepayments Inventory USA alternative minimum taxation credit carry forward Tax loss carry forward Property, plant and equipment Plantations Other non-current assets Other non-current liabilities (100) 5 14 313 (113) (26) 27 (67) 53 8 (3) – 63 (302) (160) – 8 (386) (111) 5 11 360 (141) (20) 26 (74) 56 8 (4) – 69 (292) (145) – 9 (355) Negative asset and liability positions These balances reﬂ ect the impact of tax assets and liabilities arising in different tax jurisdictions, which cannot be netted against tax assets and liabilities arising in other tax jurisdictions. Deferred tax assets recognised on the balance sheet The recognised deferred tax assets relate mostly to available unused tax losses. It is expected that there will be sufﬁ cient future taxable proﬁ ts against which these losses can be recovered. In the estimation of future taxable proﬁ ts, future product pricing and production capacity utilisation are taken into account. Unrecognised deferred tax assets Deferred tax assets are not recognised for carry-forward of unused tax losses when it cannot be demonstrated that it is probable that taxable proﬁ ts will be available against which deductible temporary differences can be utilised. US$ million 2010 2009 Unrecognised deferred tax assets relate to the following: Other non-current liabilities Tax losses Attributable to the following tax jurisdictions: Belgium The Netherlands Finland United Kingdom United States of America Swaziland South Africa Austria Expiry between two and ﬁ ve years Expiry after ﬁ ve years Indeﬁ nite life 74 630 704 63 8 47 64 198 32 3 289 704 2 205 497 704 66 634 700 49 10 39 65 222 28 2 285 700 – 152 548 700 118 Notes to the group annual ﬁ nancial statements continued US$ million 2010 2009 11. Deferred tax (continued) The following table shows the movement in the unrecognised deferred tax assets for the year Balance at beginning of year Unrecognised deferred tax assets originating during the current year Utilisation of previously unrecognised tax assets Prior year adjustments Rate adjustments Movement in foreign exchange rates Balance at end of year Reconciliation of deferred tax Deferred tax balances at beginning of year Deferred tax assets Deferred tax liabilities Deferred taxation (charge) beneﬁ t for the year (refer note 6) Other liabilities, accruals and prepayments Inventory Utilisation of Secondary Tax on Companies (STC) credits USA alternative minimum taxation credit Tax loss carry forward Property, plant and equipment Plantations Other non-current liabilities Amounts recorded directly in other comprehensive income Rate adjustments Translation differences Deferred tax balances at end of year Deferred tax assets Deferred tax liabilities Secondary Tax on Companies (STC) 700 86 (54) – 3 (31) 704 56 (355) (299) (26) 5 – – 2 (14) 15 (9) (25) 11 – (19) (333) 53 (386) 591 129 (22) 1 2 (1) 700 41 (399) (358) 41 (6) 5 (2) – 30 (10) 18 6 32 3 (17) (299) 56 (355) Current and deferred tax are measured at the tax rate applicable to undistributed income and therefore only take STC into account to the extent that dividends have been received or declared. Undistributed earnings that would be subject to STC Tax effect if distributed 484 44 465 42 2010 annual report 119 12. Goodwill and intangible assets 2010 Licence US$ million Goodwill fees Patents Brands Total Goodwill 2009 Licence fees Patents Brands Total Net carrying amount at beginning of year Acquisition Amortisation Translation difference Net carrying amount Cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount US$ million 4 – – – 4 3 – – – 3 – – – – – 25 – (2) (3) 20 32 – (2) (3) 27 4 – – – 4 3 – – – 3 – – – – – – 25 (2) 2 25 7 25 (2) 2 32 4 3 20 24 51 4 3 21 27 55 – 4 – 3 (20) (4) (24) – 20 27 – 4 – 3 (21) (2) (23) – 25 32 13. Joint ventures and associates* Cost of equity investments Share of post-acquisition proﬁ t, net of distributions received Foreign currency translation effect Summarised ﬁ nancial information in respect of the group’s equity investments is set out below: Total assets Total liabilities Net assets Group’s share of equity investments’ net assets US$ million Sales Proﬁ t for the period Group’s share of equity investments’ proﬁ t for the period 2010 2009 96 8 21 125 640 298 342 125 99 24 – 123 638 312 326 123 2010 2009 2008 691 35 13 756 28 11 902 46 17 120 Notes to the group annual ﬁ nancial statements continued 13. Joint ventures and associates* (continued) Jiangxi Chenming Sappi owns 34% of Jiangxi Chenming Paper Company Limited (Jiangxi Chenming) under a joint venture arrangement. Jiangxi Chenming is established in the People’s Republic of China and is principally engaged in the manufacturing and sales of paper and paper products. The ﬁ nancial statements of Jiangxi Chenming are to 31 December of each year which was the reporting date when the company was established. The last audited ﬁ nancials were to 31 December 2009. Umkomaas Lignin (Pty) Limited A 50% joint venture agreement with Borregaard Industries Limited for the construction and operation of a lignin plant at Umkomaas and the development, production and sale of products based on lignosulphates in order to build a sustainable lignin business. The ﬁ nancial statements of Umkomaas Lignin (Pty) Limited are to 31 December of each year which is the year end of Borregaard. The last audited ﬁ nancials were to 31 December 2009. Sapin SA A 50% joint venture with Sapin SA located in Belgium for the buying and selling of wood and wood chips to Sappi and other paper manufacturers. The ﬁ nancial statements of Sapin SA are to 31 December of each year which is the year end of Sapin SA. The last audited ﬁ nancials were to 31 December 2009. Papierholz Austria GmbH A 43% joint venture agreement for the buying and selling of wood and wood chips to Sappi and other paper and pulp manufacturers. The ﬁ nancial statements of Papierholz Austria GmbH are to 31 December of each year which is the year end of Papierholz Austria GmbH. The last audited ﬁ nancials were to 31 December 2009. Timber IV A special-purpose entity (SPE) into which Sappi contributed promissory notes (relating to certain Timberlands, equipment and machinery sold by Sappi to a third party timber company) which were pledged as collateral for the SPE to issue bonds. The SPE is not consolidated in our ﬁ nancial statements because we have taken the position that it is controlled by an unrelated investor which has sufﬁ cient equity capital at risk. Sappi’s investment in the SPE is US$6 million as of September 2010 (2009: US$6 million). The ﬁ nancial statements of Timber IV are to 30 September of each year. The results are unaudited. Energie Biberist AG A 10% investment in associate Energie Biberist AG (EBAG) in which Sappi exercises signiﬁ cant inﬂ uence by virtue of the fact that Sappi has the power to appoint one of the ﬁ ve directors. EBAG is an energy company supplying Sappi Biberist with 100% of electricity requirements. The ﬁ nancial statements of EBAG are to 31 December each year which is the year end of EBAG. The last audited ﬁ nancials of EBAG were 31 December 2009. VOF Warmtekracht During the year, Sappi purchased the remaining 50% of VOF Warmtekracht from Essent. VOF Warmtekracht was previously a 50% owned joint venture in The Netherlands between Sappi and Essent for co-generation of electricity and steam. Sappi no longer accounts for VOF Warmtekracht as a joint venture, but now consolidates this entity as part of the Sappi group ﬁ nancial statements. Where the year ends of joint ventures and associates are different to Sappi’s, the unaudited management accounts of the joint ventures and associates are used for the periods to Sappi’s year end. US$ million 14. Other non-current assets Loans to the Sappi Limited Share Incentive Trust participants Financial assets* Post-employment beneﬁ ts – pension asset (refer note 27) Other loans * Details of investments are available at the registered ofﬁ ces of the respective companies. 2010 2009 1 32 37 12 82 6 33 52 10 101 15. US$ million Inventories Raw materials Work in progress Finished goods Consumable stores and spares 2010 annual report 121 2010 2009 185 86 376 189 836 155 83 347 207 792 The charge to the group income statement relating to the write down of inventories to net realisable value amounted to US$17 million (2009: US$10 million and 2008: US$11 million). The cost of inventories recognised as an expense and included in cost of sales amounted to US$5,197 million (September 2009: US$4,467 million and September 2008: US$4,552 million). Refer to note 24 for inventory pledged as security. 16. Trade and other receivables Trade accounts receivable, gross Allowance for credit losses Trade accounts receivable, net Prepayments and other receivables 754 (14) 740 148 888 682 (15) 667 191 858 Management rate the quality of the trade and other receivables, which are neither past due nor impaired, periodically against its internal credit rating parameters. The quality of these trade receivables is such that management believe no impairment provision is necessary, except in situations where they are part of individually impaired trade receivables. The carrying amount of US$888 million (2009: US$858 million) represents the group’s maximum credit risk exposure from trade and other receivables. Prepayments and other receivables primarily represent prepaid insurance and other sundry receivables. Trade receivables (including securitised trade receivables) to turnover (%) 15% 16% 16.1 Reconciliation of the allowance for credit losses Balance at beginning of year Raised during the year Released during the year Foreign exchange currency translation effect Balance at end of year 15 9 (9) (1) 14 5 16 (6) – 15 An allowance has been made for estimated irrecoverable amounts from the sale of goods of US$14 million (2009: US$15 million). This allowance has been determined by reference to speciﬁ c customer delinquencies. 122 Notes to the group annual ﬁ nancial statements continued Trade and other receivables (continued) 16. 16.2 Analysis of amounts past due September 2010 The following provides an analysis of the amounts that are past the due contractual maturity dates: US$ million Not impaired Impaired Total Less than 7 days overdue Between 7 and 30 days overdue Between 30 and 60 days overdue More than 60 days overdue 18 18 3 15 54 – – 1 13 14 18 18 4 28 68 September 2009 The following provides an analysis of the amounts that are past the due contractual maturity dates: US$ million Not impaired Impaired Total Less than 7 days overdue Between 7 and 30 days overdue Between 30 and 60 days overdue More than 60 days overdue 9 29 9 19 66 – – – 15 15 9 29 9 34 81 All amounts due which are beyond their contractual repayment terms are reported to regional management on a regular basis. Any provision for impairment is required to be approved in line with the group limits of authority framework. The group has a provision of US$14 million (2009: US$15 million) against trade receivables that are past due. The group holds collateral of US$17 million (2009: US$17 million) against these trade receivables that are past due. The group has granted facilities to customers to buy on credit for the following amounts: US$ million Less than US$0.5 million Less than US$1 million but equal to or greater than US$0.5 million Less than US$3 million but equal to or greater than US$1 million Less than US$5 million but equal to or greater than US$3 million Equal to or greater than US$5 million 2010 2009 331 276 557 225 965 332 275 495 212 951 2,354 2,265 16.3 Fair value The directors consider that the carrying amount of trade and other receivables approximates their fair value. 16.4 Trade receivables pledged as security Trade receivables with a value of US$486 million (2009: US$460 million) have been pledged as collateral for amounts received from the banks in respect of the securitisation programme. The value of the associated liabilities at year end amounted to US$447 million (2009: US$400 million). The group is restricted from selling and repledging the trade receivables that have been pledged as collateral for the liability. 2010 annual report 123 16. Trade and other receivables (continued) 16.5 Off balance sheet structures Letters of credit discounting To improve the group working capital, the group sells certain Letters of Credit to ABN AMRO Hong Kong and DBS Bank (London) at the end of each ﬁ nancial month on a non-recourse basis. “Scheck-Wechsel” The Scheck-Wechsel is a ﬁ nancial guarantee supplied by Sappi to the bank of certain customers (trade receivables) who wish to obtain a loan to ﬁ nance early payment of speciﬁ ed trade receivables (thereby beneﬁ ting from an early settlement discount). By signing the Scheck-Wechsel, Sappi provides a ﬁ nancial guarantee to the bank of the customer. This ﬁ nancial guarantee contract is initially recognised at fair value. At inception, the risk for Sappi having to reimburse the bank is nil because there is no evidence that the customer will not reimburse its loan to the bank. There is also no guarantee fee due by the bank and the Scheck-Wechsel is a short term instrument (maximum 90 days). Therefore the fair value is zero at inception. Subsequently, the ﬁ nancial guarantee contract is measured at the higher of: (i) the amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets; and (ii) the amount initially recognised less any cumulative amortisation. As no event of default has occurred, no provision has been set up and the fair value at year end remains at zero. However, according to IAS 37, a contingent liability of US$29 million (2009: US$25 million) has been disclosed in this respect. Trade receivables securitisation To improve our cash ﬂ ows in a cost-effective manner, Sappi Trading, Sappi Fine Paper Europe and Sappi Fine Paper North America sell all eligible trade receivables on a non-recourse basis to special-purpose entities (SPEs) that are owned and controlled by third party ﬁ nancial institutions. These SPEs are funded with us but securitise assets on behalf of their sponsors for a diverse range of unrelated parties. We have a servicing agreement with the entities acquiring our receivables, acting as servicers for the collection of cash and administration of the trade receivables sold. Sappi Southern Africa securitisation facility Sappi sells the majority of its ZAR receivables to Rand Merchant Bank Limited, which issues commercial paper to ﬁ nance the purchase of the receivables. Sappi does not guarantee the recoverability of any amounts, but shares proportionately with Rand Merchant Bank Limited the credit risk of each underlying receivable, after all recoveries, including insurance recoveries, with Sappi bearing 15% of such risk (and Rand Merchant Bank Limited the remainder). Sappi administers the collection of all amounts processed on behalf of the bank that are due from the customer. The purchase price of these receivables is adjusted dependent on the timing of the payment received from the client. The rate of discounting that is charged on the receivables is JIBAR (Johannesburg Inter-bank Agreed Rate) plus a spread. This structure is currently treated as an off balance sheet arrangement. If this securitisation facility were to be terminated, we would discontinue further sales of trade receivables and would not incur any losses in respect of receivables previously sold in excess of the 15% mentioned above. There are a number of events which may trigger termination of the facility, amongst others, an amount of defaults above a speciﬁ ed level; terms and conditions of the agreement not being met; or breaches of various credit insurance ratios. The impact on liquidity varies according to the terms of the agreement; generally, however, future trade receivables would be recorded on balance sheet until a replacement agreement was entered into. The total amount of trade receivables sold at the end of September 2010 amounted to US$215 million (September 2009: US$171 million). Details of the securitisation programme at the end of ﬁ scal 2010 and 2009 are disclosed in the tables below: Bank 2010 Currency Value Facility Discount charges Rand Merchant Bank Limited ZAR ZAR1,510 million Unlimited* Linked to 3 month JIBAR 2009 Rand Merchant Bank Limited ZAR ZAR1,268 million Unlimited* Linked to 3 month JIBAR * The facility in respect of the securitisation facility is unlimited, but subject to the sale of qualifying receivables to the bank. 124 Notes to the group annual ﬁ nancial statements continued 16. Trade and other receivables (continued) 16.5 Off balance sheet structures (continued) Details of the on balance sheet securitisation facilities are described in note 20. 16.6 Analysis of customers A signiﬁ cant portion of the group’s sales and accounts receivable are from major groups of customers. None of the group’s major customers represented more than 10% of our sales during the years ended September 2010 and September 2009. Where appropriate, credit insurance has been taken out over the group’s trade receivables. None of the group’s other receivable ﬁ nancial instruments represent a high concentration of credit risk because the group has dealings with a variety of major banks and customers world-wide. The group has the following amounts due from single customers: Greater than US$10 million Between US$5 million and US$10 million Less than US$5 million 2010 2009 Number of customers US$ million Percentage Number of customers US$ million Percentage 7 13 2,176 2,196 131 81 528 740 18% 11% 71% 100% 6 9 2,519 2,534 82 55 530 667 12% 8% 80% 100% None of the trade receivables, with balances of equal to or greater than US$5 million as at year end have breached their contractual maturity terms. No impairment charges have been recognised in respect of customers who owe the group more than US$5 million. Refer note 29 for further details on credit risk. 17. Ordinary share capital and share premium Authorised share capital: Ordinary shares of ZAR1 each “A” ordinary shares of ZAR1 each* Issued share capital: Ordinary shares of ZAR1 each “A” ordinary shares of ZAR1 each* Treasury shares** Share premium 2010 2009 Number of shares US$ million Number of shares US$ million 725,000,000 19,961,476 541,446,223 19,961,476 (41,896,595) 725,000,000 – 537,117,864 – (21,384,559) 77 3 (6) 1,564 519,511,104 1,638 515,733,305 73 – (3) 1,471 1,541 * The “A” ordinary shares are unlisted but will rank pari passu with the ordinary shares in all respects except for dividend entitlements where the “A” ordinary shares will be entitled to ﬁ fty percent of the dividends payable on the ordinary shares. The “A” ordinary shares will have the same voting rights as ordinary shares but will not be listed on the JSE Limited. Sappi will have the option to repurchase a number of “A” ordinary shares in August 2019. The number of any “A” ordinary shares that Sappi elects to buy back on the repurchase date will depend on the price performance of the ordinary shares over the period of the transaction with the remaining “A” ordinary shares being distributed to the beneﬁ ciaries and converted into ordinary shares. The “A” ordinary shares’ rights, terms, conditions of conversion and privileges are contained in Article 38 of Sappi’s Articles, details of which are available for inspection at the company’s registered ofﬁ ces. ** Includes 21,935,119 (September 2009: 21,384,559) ordinary shares as well as 19,961,476 (2009: nil) “A” ordinary shares that are held by group entities, including The Sappi Limited Share Incentive Trust (the Scheme) and the trusts set up to house the Broad-based Black Economic Empowerment transaction. These may be utilised to meet the requirements of the trusts. The authorised share capital was increased during the year with 19,961,476 “A” ordinary shares with a par value of ZAR1.00 per share as part of Sappi’s 2010 Broad-based Black Economic Empowerment transaction (refer to note 28 for further details). The issued ordinary share capital increased during the year from ZAR537,117,864 to ZAR541,446,223 with the issue of 4,328,359 ordinary shares as part of the unwinding of the 2006 Broad-based Black Economic Empowerment transaction and 19,961,476 “A” ordinary shares as part of Sappi’s 2010 Broad-based Black Economic Empowerment transaction. Costs related to the Broad- based Black Economic Empowerment transaction of US$3 million were charged to share premium in the current year. 2010 annual report 125 Number of shares 2010 2009 17. Ordinary share capital and share premium (continued) The movement in the number of treasury shares is set out in the table below: Ordinary treasury shares: Ordinary treasury shares at beginning of year (including Scheme shares) Rights issue shares subscribed Treasury shares issued to participants of the Scheme – Share options (per note 28) – Share plan options (per note 28) – Allocation shares (per note 28) – Restricted shares (per note 28) – Scheme shares forfeited, released and other Ordinary treasury shares at end of year “A” ordinary treasury shares: “A” ordinary shares issued to the Broad-based Black Economic Empowerment trusts 21,384,559 – 550,560 9,906,661 11,860,873 (382,975) – – – – 550,560 (206,140) (165,491) (214,660) (22,000) 225,316 21,935,119 21,384,559 19,961,476 – 41,896,595 21,384,559 Included in the issued and unissued ordinary share capital of 725,000,000, is a total of 42,700,870 shares (adjusted for the rights issue) which may be used to meet the requirements of the Scheme and/or The Sappi Limited Performance Share Incentive Trust (the Plan). In terms of the rules of the Scheme and the Plan, the maximum number of shares which may be acquired in aggregate by the Scheme and/or the Plan and allocated to participants of the Scheme and/or the Plan, from time to time is 42,700,870 shares, subject to adjustment in case of any increase or reduction of Sappi’s issued share capital on any conversion, redemption, consolidation, sub-division and/or any rights or capitalisation issue of shares. Sappi is obliged to reserve and keep available at all times out of its authorised but unissued share capital such number of shares (together with any treasury shares held by Sappi subsidiaries which may be used for the purposes of the Scheme and/or the Plan) as shall then be required in terms of the Scheme and/or the Plan. Authority to use treasury shares for the purposes of the Scheme and/or the Plan was granted by shareholders at the annual general meeting held on 7 March 2005. Since March 1994, 2,970,582 (September 2009: 2,970,582) shares have been allocated to the Scheme participants and paid for, and 14,799,182 (September 2009: 11,910,172) shares have been allocated to the Scheme participants and not yet paid for. In terms of the Plan, 9,312,840 (September 2009: 9,736,450) shares have been allocated and remain unpaid for, and 176,491 (September 2009: 165,491) shares have been allocated and paid for by the Plan participants. Capital risk management The capital structure of the group consists of: ■ issued share capital and premium and accumulated proﬁ ts disclosed above and in the statement of changes in equity respectively; ■ debt, which includes interest-bearing borrowings and obligations due under ﬁ nance leases disclosed under note 20; and ■ cash and cash equivalents. The group’s capital management objective is to achieve an optimal weighted average cost of capital while continuing to safeguard the group’s ability to meet its liquidity requirements (including capital expenditure commitments), repay borrowings as they fall due and continue as a going concern. The group monitors its gearing through a ratio of net debt (interest-bearing borrowings and overdraft less cash and cash equivalents) to total capitalisation (shareholders’ equity plus net debt). The group has entered into a number of debt facilities which contain certain terms and conditions in respect of capital management. During ﬁ scal 2010 and 2009, we were in compliance with the ﬁ nancial covenants relating to the loans payable. The group’s strategy with regard to capital risk management remains unchanged from 2009. 126 Notes to the group annual ﬁ nancial statements continued US$ million 2010 2009 2008 18. Other comprehensive income (loss) Exchange differences on translation Gross amount Tax Actuarial (losses) gains on pensions and post-employment beneﬁ ts Gross amount (refer note 27) Tax Fair value adjustment on available-for-sale ﬁ nancial instruments Gross amount Tax Hedging reserves Gross amount Tax Other comprehensive income (loss) recorded directly in equity Proﬁ t (loss) for the year Total comprehensive income (loss) for the year 52 52 – (60) (71) 11 2 2 – 14 14 – 8 66 74 14 14 – (197) (229) 32 – – – (14) (14) – (197) (177) (374) (262) (262) – 6 7 (1) – – – – – – (256) 102 (154) US$ million 2010 2009 19. Non-distributable reserves Legal reserves in subsidiaries Share-based payment reserve Other Capital reduction(1) Capitalisation of distributable reserves(2) Available-for-sale ﬁ nancial assets 78 69 14 1 11 2 82 48 13 1 12 – 161 143 2010 Share- based payment reserve Legal reserves(2) Other Total Legal reserves(2) 2009 Share- based payment reserve Opening balance Transfer from retained earnings Share-based payment expense Movement on available-for-sale ﬁ nancial assets Translation difference 82 2 – – (6) 78 48 – 17 – 4 69 13 – – 2 (1) 14 143 2 17 2 (3) 161 75 6 – – 1 82 35 – 9 – 4 48 Other Total 14 – – – (1) 13 124 6 9 – 4 143 (1) Reduction in capital arising from the transfer of share premium under a special resolution dated 14 April 1975. (2) Represents equity of the company that is not available for distribution as a result of appropriations of equity by subsidiaries and legal requirements respectively. 2010 annual report 127 US$ million 2010 2009 2008 20. Interest-bearing borrowings Secured borrowings – Mortgage and pledge over trade receivables and certain assets (refer note 24 for details of encumbered assets) – Capitalised lease liabilities (refer note 24 for details of encumbered assets) Total secured borrowings* Unsecured borrowings* Total borrowings (refer note 29) Less: Current portion included in current liabilities 1,605 50 1,655 1,353 3,008 691 2,317 1,849 71 1,920 1,407 3,327 601 2,726 468 29 497 2,156 2,653 821 1,832 * Our September 2009 disclosure has been amended to correctly reﬂ ect the split between secured and unsecured interest-bearing borrowings and to reﬂ ect the classiﬁ cation set out in the detailed list of borrowings in note 20 to the 2009 group annual ﬁ nancial statements. 2009 Secured borrowings** Unsecured borrowings Total As previously reported Adjustment Adjusted 1,350 1,977 3,327 570 (570) – 1,920 1,407 3,327 ** Mortgage and pledge over trade receivables and certain assets of US$1,849 million was previously disclosed as US$1,321 million, and capitalised lease liabilities of US$71 million was previously disclosed as US$29 million. The repayment proﬁ le of the interest-bearing borrowings is as follows: Payable in the year ended September: 2010* 2011* 2012 2013 2014 2015 (September 2009: thereafter) Thereafter 2010 2009 691 892 352 842 7 224 601 261 890 338 895 342 – 3,008 3,327 * Included in the US$691 million reﬂ ected as payable in 2010 is US$447 million debt relating to securitisation funding (2009: US$400 million included in US$601 million) which has the character of a short-term revolving facility but is expected to run until 31 December 2011 under the existing contractual arrangements, and the intention is to renew this arrangement well ahead of maturity. 128 Notes to the group annual ﬁ nancial statements continued 20. Interest-bearing borrowings (continued) Capitalised lease liabilities Finance leases are primarily for plant and equipment. Lease terms generally range from ﬁ ve to ten years with options to make early settlements or renew at varying terms. At the time of entering into capital lease agreements, the commitments are recorded at their present value using applicable interest rates. As of September 2010, the aggregate amounts of minimum lease payments and the related imputed interest under capitalised lease contracts payable in each of the next ﬁ ve ﬁ nancial years and thereafter are as follows: 2010 2009 Minimum lease payments Interest Present value of minimum lease payments Minimum lease payments Interest Present value of minimum lease payments Payable in the year ended September: 2010 2011 2012 2013 2014 2015 (September 2009: thereafter) Total future minimum lease payments – 16 17 15 6 7 61 – (5) (3) (2) (1) – (11) – 11 14 13 5 7 50 23 17 18 15 6 7 86 (4) (3) (2) (2) (1) (1) (13) 19 14 16 13 5 6 73 2010 annual report 129 20. Interest-bearing borrowings (continued) Set out below are details of the more signiﬁ cant non-current interest-bearing borrowings in the group at September 2010. Currency Interest rate Principal amount outstanding Balance sheet value Security/Cession Expiry Financial covenants Redeemable bonds Public bond EUR Fixed EUR350 million EUR319 million(2,6) Public bond US$ Fixed(7) US$300 million(7) US$274 million(2,6) August 2014 No ﬁ nancial covenants August 2014 No ﬁ nancial covenants Property, plant and equipment, inter- company receivables and shares in subsidiaries Property, plant and equipment, inter- company receivables and shares in subsidiaries Public bond US$ Fixed US$500 million US$513 million(2,3,6) Unsecured June 2012 Public bond US$ Fixed US$221 million US$222 million(2,3,6) Unsecured June 2032 Public bond ZAR Fixed ZAR1,000 million ZAR1,000 million Unsecured June 2013 Public bond ZAR Fixed ZAR1,000 million ZAR1,000 million Unsecured October 2011 Public bond ZAR Fixed ZAR498 million ZAR498 million(6) Unsecured June 2012 No ﬁ nancial covenants No ﬁ nancial covenants No ﬁ nancial covenants No ﬁ nancial covenants No ﬁ nancial covenants Private placement bond Private placement bond Private placement bond Private placement bond Secured loans State Street Bank State Street Bank ZAR Fixed ZAR134 million ZAR134 million Unsecured November 2012 No ﬁ nancial ZAR Fixed ZAR133 million ZAR133 million Unsecured January 2013 ZAR Fixed ZAR33 million ZAR33 million Unsecured March 2013 covenants No ﬁ nancial covenants No ﬁ nancial covenants ZAR Fixed ZAR61 million ZAR61 million(6) Unsecured December 2013 No ﬁ nancial covenants EUR Variable EUR231 million EUR231 million Trade receivables Revolving facility EBITDA to net US$ Variable US$61 million US$61 million Trade receivables interest and net debt to EBITDA(5) Revolving facility EBITDA to net interest and net debt to EBITDA(5) 130 Notes to the group annual ﬁ nancial statements continued 20. Interest-bearing borrowings (continued) Currency Interest rate Principal amount outstanding Balance sheet value Security/Cession Expiry Financial covenants Secured loans (continued) State Street Bank Österreichische Kontrollbank Österreichische Kontrollbank US$ Variable US$75 million US$75 million Trade receivables Revolving facility EBITDA to net interest and net debt to EBITDA(5) EBITDA to net interest and net debt to EBITDA(5) EUR Fixed EUR320 million EUR310 million(2,6) Property, plant and April 2014 EUR Variable EUR25 million EUR25 million(1)(2) equipment, inter- company receivables and shares in subsidiaries Property, plant and equipment, inter- company receivables and shares in subsidiaries June 2013 EBITDA to net interest and net debt to EBITDA(5) Capitalised leases Fortum EUR Variable EUR22 million EUR22 million Plant and equipment November 2012 No ﬁ nancial covenants Rand Merchant Bank ZAR Fixed ZAR148 million ZAR148 million(1) Buildings September 2015 No ﬁ nancial covenants Unsecured bank term loans Österreichische Kontrollbank EUR Variable EUR58 million EUR58 million(1) Unsecured December 2010 No ﬁ nancial Nedbank ZAR Fixed ZAR350 million ZAR350 million(1) Unsecured January 2011 Nedbank ZAR Fixed ZAR397 million ZAR397 million Unsecured March 2014 Peritum Trading ZAR Fixed ZAR13 million ZAR13 million(1) Unsecured June 2014 covenants No ﬁ nancial covenants Gearing ratio/ interest & dividend cover(4) No ﬁ nancial covenants Royal Bank of Scotland EUR Fixed EUR12 million EUR12 million Unsecured December 2010 No ﬁ nancial covenants 20. Interest-bearing borrowings (continued) The analysis of the currency per debt is: US$(8) EURO ZAR 2010 annual report 131 Local currency million US$ million 1,151 979 3,766 1,151 1,321 536 3,008 (1) The value outstanding equals the total facility available. (2) In terms of the agreement, limitations exist on liens, sale and leaseback transactions and mergers and consolidation. Sappi Limited must maintain a majority holding in Sappi Papier Holding GmbH Group. (3) Sappi Papier Holding GmbH, Sappi Limited or Sappi International SA may at any time redeem the June 2012 and 2032 public bonds (the “Securities”) in whole or in part at a redemption price equal to the greater of (i) 100% of the principal amount of the Securities to be redeemed and (ii) a make-whole amount based upon the present values of remaining payments at a rate based upon yields of speciﬁ ed US treasury securities plus 25 basis points, with respect to the 2012 Securities, and 30 basis points, with respect to the 2032 Securities, together with, in each case, accrued interest on the principal amount of the securities to be redeemed to the date of redemption. (4) The ﬁ nancial covenant relates to the ﬁ nancial position of Sappi Southern Africa (Pty) Limited, a wholly-owned subsidiary of Sappi Limited. (5) Financial covenants relate to the Sappi Limited Group. (6) The principal value of the loans/bonds corresponds to the amount of the facility, however, the outstanding amount has been adjusted by the discounts paid upfront and the fair value adjustments relating to hedge accounting. (7) USD ﬁ xed rates have been swapped into EUR ﬁ xed rates. These swaps are subject to hedge accounting in order to reduce as far as possible the foreign exchange exposure. (8) This amount includes debt of US$300 million that is swapped into Euro. A detailed reconciliation of total interest-bearing borrowings has been performed in note 29. Other restrictions As is the norm for bank loan debt, a portion of Sappi Limited’s ﬁ nancial indebtedness is subject to cross default provisions. Breaches in bank covenants in certain subsidiaries, if not corrected in time, might result in a default in group debt, and in this case, a portion of Sappi Limited consolidated liabilities might eventually become payable on demand. During ﬁ scal 2010 and 2009, we were in compliance with the ﬁ nancial covenants relating to all loans payable. Regular monitoring of compliance with applicable covenants occurs. If there is a possible breach of a ﬁ nancial covenant in the future, negotiations would commence with the applicable institutions before such breach occurs. Borrowing facilities secured by trade receivables The group undertakes several trade receivable securitisation programmes due to the cost effectiveness of such structures. These structures, with the exception of the South African scheme, are accounted as on balance sheet, with a corresponding liability (external loan) being recognised and corresponding interest is recognised as ﬁ nance cost. The trade receivables are legally transferred, however, most of the market risk (foreign exchange risk and interest rate risk) and the credit risk is retained by Sappi. As a consequence, based on the risks and rewards evaluation, these securitised receivables do not qualify for de-recognition under IAS 39. Further detail of the value of trade receivables pledged as security for these loans is included in note 16. Sappi Fine Paper North America Sappi sells the majority of its US$ receivables to Galleon Capital LLC on a non-recourse basis. Credit enhancement includes a 3% deferred purchase price plus a letter of credit in the amount of US$18 million that relates to the uninsured portion of those obligors with concentrations above 3% (Sappi, as servicer of the receivables, is responsible for the collection of all amounts that are due from the customer). The rate of discounting charged on the receivables is LIBOR (London Inter-bank Offered Rate) plus a margin for receivables to customers located in Organisation for Economic Co-operation and Development (OECD) countries. 132 Notes to the group annual ﬁ nancial statements continued 20. Interest-bearing borrowings (continued) Sappi Fine Paper Europe and Sappi Trading Under a combined securitisation arrangement for Sappi Fine Paper Europe and Sappi Trading, Sappi sells receivables to Galleon Capital LLC on a non-recourse basis. Credit enhancement is calculated by deducting a deferred purchase price of 14%. Sappi is responsible for the collection of all amounts that are due from the customer. The rate of discounting that is charged on the receivables is LIBOR (London Inter-bank Offered Rate) plus a margin for receivables to customers located in OECD countries plus a further margin for receivables to customers located in non-OECD countries. Unutilised facilities The group monitors its availability of funds on a weekly basis. The group treasury committee determines the amount of unutilised facilities to determine the headroom which it currently operates in. The net cash balances included in current assets and current liabilities are included in the determination of the headroom available. Unutilised committed facilities US$ million Currency Interest rate Syndicated loan* EUR Variable (EURIBOR) 2010 282 2009 307 * Syndicated loan with a consortium of banks with JP Morgan Europe Limited as facility agent with a remaining revolving facility available of EUR209 million, which is subject to ﬁ nancial covenants relating to the Sappi Limited Group and is secured by the same assets as the public bonds maturing in 2014. These committed facilities represent amounts that the group could utilise. The syndicated loan facility matures in May 2012. We have paid a total commitment fee of US$7 million (2009: US$0.8 million) in respect of the syndicated loan facility. Unutilised uncommitted facilities US$ million Currency Interest rate 2010 2009 Held by: Southern Africa Group Treasury – Europe ZAR EUR Variable (JIBAR) Variable (EURIBOR) Total unutilised facilities (committed and uncommited) excluding cash Fair value The fair value of all interest-bearing borrowings is disclosed in note 29 on ﬁ nancial instruments. 417 – 417 699 445 54 499 806 US$ million 2010 2009 21. Other non-current liabilities Post-employment beneﬁ ts – pension liability (refer note 27) Post-employment beneﬁ ts other than pension liability (refer note 27) Long-term employee beneﬁ ts Workmen’s compensation Long service awards Land restoration provision Deferred income Other 298 178 5 9 26 19 3 8 308 172 9 8 27 19 3 11 546 557 2010 annual report 133 US$ million 22. Provisions Restructuring provisions Other provisions Balance at September* * These are all included in current liabilities Restructuring provisions Balance at September 2008 Increase in provisions Utilised Released during the year Other movements Translation effect Balance at September 2009 Increase in provisions Utilised Released during the year Other movements Translation effect Balance at September 2010 2010 2009 29 4 33 Severance, retrenchment & related costs Lease cancellation & penalty costs Other restructuring 27 17 (24) (1) (1) – 18 10 (19) – – – 9 4 – (1) – (1) 1 3 – – – – (1) 2 10 21 (10) (4) (5) (1) 11 31 (23) (2) 1 – 18 32 3 35 Total 41 38 (35) (5) (7) – 32 41 (42) (2) 1 (1) 29 September 2010 Restructuring Plans Sappi Fine Paper Europe Kangas Mill. On 12 January 2010, Sappi Fine Paper Europe ceased operations at its Kangas Mill. A total of 150 employees were affected by the closure of the mill. A total restructuring provision of US$14 million was raised during the year of which US$8 million was utilised by September 2010. Sappi Southern Africa Usutu Mill. In the ﬁ nal quarter of our 2009 ﬁ scal year, Sappi had begun consultation with stakeholders with the intention of permanently ceasing production at Usutu mill. Adverse market conditions and the cumulative severe impact of ﬁ re damage over past years had made the mill unviable. In January 2010, Sappi Southern Africa ceased production at the mill. 491 employees were affected by the closure by ﬁ scal year end. A provision relating to severance, retrenchment and other related closure costs of US$24 million was raised during the year; US$14 million of which remained at ﬁ scal year end. 134 Notes to the group annual ﬁ nancial statements continued 22. Provisions (continued) September 2009 Restructuring Plans Sappi Fine Paper Europe Kangas Mill. During the ﬁ scal year ended September 2009, the company announced that it had entered into a consultation process with employees’ representatives with a view to restructuring working models. The consultation process with employee representatives came to an end in July 2009 resulting in nine employees being made redundant. After the term of notice and remodelling, employment contracts ended in April 2010. A provision of approximately US$1 million relating to retrenchment costs was raised. Kirkniemi Mill. The mill started consultation negotiations with the employee representatives on 06 April 2009 for production and economical reasons. Negotiations came to an end on 19 May 2009 resulting in 63 employees being made redundant. A provision of approximately US$2 million was raised. Sappi Fine Paper North America Muskegon Mill. During the ﬁ nancial year ended September 2009, Sappi Fine Paper North America announced the decision to permanently close the Muskegon Mill and integrate the mill’s products into the production lines at the Somerset and Cloquet Mills. A total of 190 employees were affected by the closure of the Muskegon Mill. Muskegon mill had an annual capacity of 170,000 tons of coated ﬁ ne paper. A provision of approximately US$21 million relating to restructuring charges was raised. Sappi Southern Africa Regional restructuring. During the ﬁ nancial year ended September 2009, Sappi Southern Africa announced that it had entered into a process of consultations with employees at Tugela, Ngodwana and Enstra mills regarding proposals for cost reduction and efﬁ ciency improvement initiatives. The restructuring affected approximately 227 employees. A total provision of approximately US$2 million was raised. US$ million 2010 2009 2008 Notes to the cash ﬂ ow statements 23. 23.1 Cash generated from operations Proﬁ t (loss) for the year Adjustment for: – Depreciation – Fellings – Amortisation – Taxation charge (beneﬁ t) – Net ﬁ nance costs – Asset (impairment reversals) impairments – Fair value adjustment gains and growth on plantations – Post-employment beneﬁ ts funding – Broad-based Black Ecomonic Empowerment transaction charge – Other non-cash items 23.2 (Increase) decrease in working capital (Increase) decrease in inventories (Increase) decrease in receivables Increase (decrease) in payables 66 411 71 2 20 255 (20) (98) (73) 23 80 737 (72) (74) 141 (5) (177) 396 69 2 (41) 145 79 (6) (62) – 27 432 116 175 (139) 152 102 374 80 – 86 126 119 (190) (88) – 14 623 (38) (19) 58 1 2010 annual report 135 US$ million 2010 2009 2008 23. 23.3 Notes to the cash ﬂ ow statements (continued) Finance costs paid Gross interest and other ﬁ nance costs Net foreign exchange gains Net fair value gains (losses) on ﬁ nancial instruments Non-cash movements included in items above 23.4 Taxation paid Amounts unpaid at beginning of year Translation effects Taxation beneﬁ t (charge) to proﬁ t or loss Net amounts unpaid at end of year Cash amounts paid 23.5 Replacement of non-current assets Property, plant and equipment Plantations 23.6 Proceeds on disposal of non-current assets Book value of property, plant and equipment disposed of Proﬁ t on disposal 23.7 Cash and cash equivalents Cash and deposits on call Money market instruments (309) 17 21 65 (206) (54) 4 6 35 (9) (173) – (173) 16 5 21 791 1 792 (198) 17 (25) 99 (107) (54) (2) (3) 54 (5) (146) (1) (147) – 2 2 727 43 770 (181) 8 (7) 41 (139) (125) 7 (6) 54 (70) (250) – (250) 2 5 7 221 53 274 136 Notes to the group annual ﬁ nancial statements continued US$ million 2010 2009 2008 24. Encumbered assets The book values of assets which are mortgaged, hypothecated or subject to a pledge as security for borrowings, subject to third party ownership in terms of capitalised leases or suspensive sale agreements, are as follows: Land and buildings Plant and equipment* Inventory Trade receivables 309 1,295 186 486 2,276 322 1,542 164 460 2,488 17 176 – 415 608 * This has been increased by US$157 million (2008: US$172 million) to reﬂ ect certain assets that were also encumbered. Plant and equipment was previously disclosed as US$1,385 million in 2009 (2008: US$4 million). Plant and equipment 2009 2008 As previously reported Adjustment Adjusted 1,385 4 157 172 1,542 176 Suspensive sale agreements are instalment sale agreements which the group has entered into in respect of certain property, plant and equipment where the assets purchased are encumbered as security for the outstanding liability until such time that the liability is discharged. The encumbered assets relate mainly to the security provided under the following facilities: ■ Public High Yield Bonds of US$300 million and EUR350 million respectively, both due 2014; ■ Österreichische Kontrollbank loans of EUR400 million (current outstanding balance of EUR320 million) and EUR25 million respectively; and ■ The Committed Revolving Credit Facility of EUR209 million. The security consists substantially of (i) the land, plant and equipment located at Sappi’s production facilities in Gratkorn, Austria; Kirkniemi, Finland; Maastricht, The Netherlands; Nijmegen, The Netherlands; Skowhegan/Somerset, Maine, USA, and Cloquet, Minnesota, USA and (ii) certain inventory owned by SD Warren Company and Sappi Cloquet LLC. The security also includes certain shares in subsidiaries and certain inter-company receivables which are not reﬂ ected in the total above. 2010 annual report 137 US$ million 2010 2009 2008 25. Commitments Capital commitments Contracted but not provided Approved but not contracted Future forecasted cash ﬂ ows of capital commitments: 2009 2010 2011 (September 2008: thereafter) 2012 (September 2009: thereafter) Thereafter 62 109 171 104 32 35 171 62 126 188 102 48 38 – 188 76 130 206 154 35 17 – – 206 The capital expenditure is expected to be ﬁ nanced by funds generated by the business, existing cash resources and borrowing facilities available to the group. Further information on capital commitments relating to environmental matters can be found in note 32. US$ million 2010 2009 2008 Lease commitments Future minimum obligations under operating leases – undiscounted: Payable in the year ended September: 2009 2010 2011 2012 2013 2014 (September 2008: thereafter) 2015 (September 2009: thereafter*) Thereafter 40 23 16 9 5 37 130 31 14 7 4 2 38 – 96 28 14 9 4 2 35 – – 92 * The lease commitments for 2009 was previously disclosed as US$60 million. This has been increased by US$36 million to include a land lease commitment that should have been reﬂ ected. As previously reported Adjustment Adjusted Future minimum obligations under operating leases – September 2009: thereafter 2 36 38 138 Notes to the group annual ﬁ nancial statements continued US$ million 26. Contingent liabilities Guarantees and suretyships Other contingent liabilities 2010 2009 48 8 44 8 Included under guarantees and suretyships are bills of exchange where Sappi has guaranteed third party funding of payments to Sappi for certain German accounts receivables. Other contingent liabilities mainly relate to taxation queries in respect of certain group companies. The group is involved in various lawsuits and administrative proceedings. The relief sought in such lawsuits and proceedings includes injunctions, damages and penalties. Although the ﬁ nal results in these suits and proceedings cannot be predicted with certainty, it is the present opinion of management, after consulting with legal counsel, that they are not expected to have a material effect on the group’s consolidated ﬁ nancial position, results of operations or cash ﬂ ows. 27. Post-employment beneﬁ ts – pensions and other beneﬁ ts Summary of results US$ million 2011 2010 2009 2010 2009 2010 2009 All plans Deﬁ ned contribution plans Deﬁ ned beneﬁ t pension plans Other deﬁ ned beneﬁ t plans Post-retirement plan cost recognised in income statements Employer contributions paid over the ﬁ scal year Expected employer contributions to be paid over next ﬁ scal year – Deﬁ ned contribution plans – Deﬁ ned beneﬁ t pension plans – Other deﬁ ned beneﬁ t plans Pension/beneﬁ t plan liability is presented on the balance sheets as follows: Pension/beneﬁ t liability (refer note 21) Pension asset (refer note 14) Accrued contributions*/obligations (included in other payables) Net balance sheet liability 42 54 12 42 40 33 33 15 66 21 54 14 11 10 10 298 (37) – 261 308 (52) – 256 178 – 7 185 172 – 7 179 4 4 2 2 * Amounts to deﬁ ned contribution plans due in respect of the current reporting period that had not yet been paid over to the plans. 2010 annual report 139 27. Post-employment beneﬁ ts – pensions and other beneﬁ ts (continued) US$ million Development in the balance sheets for the pension/beneﬁ t plans is shown in the table below and graphically following: Net pension/beneﬁ t liability at start of year Net pension liability acquired during the year Net pension/beneﬁ t cost for the year Employer contributions Net actuarial (loss) gain for the year to other comprehensive income (OCI) Foreign currency gain (loss) exchange effect Net pension/beneﬁ t liability at end of year Deﬁ ned beneﬁ t pension plans Other deﬁ ned beneﬁ t plans 2010 2009 2010 2009 (256) – (15) 66 (73) 17 (261) (27) (52) (21) 54 (207) (3) (256) (179) (148) – (14) 11 2 (5) – (10) 10 (22) (9) (185) (179) Accumulated liabilities exceeded assets in all deﬁ ned beneﬁ t plans except for two plans in southern Africa and one plan in Europe. Synopsis for the year for defi ned pension/benefi t plans Reductions in corporate bond yields and rising long term implied inﬂ ation in some regions caused liabilities in our deﬁ ned beneﬁ t plans to increase. Assets in our funded plans grew in all regions, but growth was less than the increase in liabilities, leading to increased deﬁ cits at the end of 2010. 140 Notes to the group annual ﬁ nancial statements continued 27. Post-employment beneﬁ ts – pensions and other beneﬁ ts (continued) Detailed results Defi ned contribution plans The group operates deﬁ ned contribution plans of various sizes for all qualifying employees in most regions throughout the group. The assets of the plans are held separately from those of the group in funds under the control of trustees. In addition, the group participates in country-wide union/industry plans in certain locations open to eligible employees. The total cost charged to the income statement of US$42 million (September 2009: US$33 million, September 2008: US$23 million) represents contributions payable to these plans by the group based on rates speciﬁ ed in the rules of these plans. As at September 2010, US$4 million (September 2009: US$2 million, September 2008: US$2 million) was due in respect of the current reporting period that had not yet been paid over to the plans. Part of the increase in total cost charged relates to a rearrangement in a plan in southern African whereby effective from May 2009, members no longer pay contributions and the company meets all contributions. The effect of this change is an increase in company contributions of US$8 million (September 2009: US$2 million). Defi ned benefi t pension plans The group operates 14 principal (gross liabilities each exceeding US$20 million) deﬁ ned beneﬁ t pension and/or lump sum plans plus a number of smaller plans. These include plans closed to new entrants and plans closed to future accrual for existing members. Plans open to new entrants or future accrual cover all qualifying employees. All plans have been established in accordance with applicable legal requirements, customs and existing circumstances in each country. Plans remain open to new members except for the following: plans in southern Africa, Austria, some in Germany and one in North America. Plans in the United Kingdom are closed to future accrual. Beneﬁ ts are generally based upon compensation and years of service, with varying deﬁ nitions of compensation such as average salary near retirement or career average revalued earnings. Exceptions to these are certain plans in Germany and Austria that provide ﬁ xed beneﬁ ts and certain plans in North America that provide beneﬁ ts based on years of service and a ‘$ multiplier’. The $ multiplier is a nominal US Dollar amount that historically has increased from time to time. In Switzerland, the company has a deﬁ ned contribution plan providing guaranteed minimum investment returns to members’ funds and pays pensions out of fund proceeds and reserves (if required). The plan has a liability under IAS 19 which is disclosed with other deﬁ ned beneﬁ t pension plan liabilities in this note. With the exception of our German and Austrian plans (which are unfunded), the assets of these plans are held in separate trustee administered funds which are subject to varying statutory requirements in the particular countries concerned. In terms of these requirements, periodic actuarial valuations of these funds are performed by independent actuaries. As of September 2010, the total number of active members in our deﬁ ned beneﬁ t pension plans is approximately 8,400. Actuarial valuations of the European and North American funds are performed annually. An actuarial review is performed annually for the South African and United Kingdom funds, with an actuarial valuation being performed on a tri-annual basis. Group companies have no other signiﬁ cant post-employment deﬁ ned beneﬁ t obligations, except for the following: ■ Post-retirement healthcare beneﬁ ts provided to persons in North America and in South Africa totalling US$185 million. ■ Jubilee (long service award plans) in continental Europe of US$26 million, an early retirement benefit plan in Belgium of US$5 million (refer to note 21). ■ ‘ATZ’ (early retirement) beneﬁ t obligations in Germany totalling US$7 million. ■ Workmans’ compensation beneﬁ t obligations in North America totalling US$13 million. All pension obligations were measured at the end of the ﬁ nancial year. Post-employment benefi ts other than pensions (‘other defi ned benefi t’ plans) The group sponsors two deﬁ ned beneﬁ t post-employment plans that provide certain healthcare and life insurance beneﬁ ts to eligible retired employees of the North American and South African operations. Employees are generally eligible for beneﬁ ts upon retirement and completion of a speciﬁ ed number of years of service. Actuarial valuations of all the plans are performed annually. All post-employment obligations were measured at the end of the ﬁ nancial year. 2010 annual report 141 27. Post-employment beneﬁ ts – pensions and other beneﬁ ts (continued) US$ million 2010 2009 Deﬁ ned beneﬁ t pension plans Other deﬁ ned beneﬁ t plans Deﬁ ned beneﬁ t pension plans Other deﬁ ned beneﬁ t plans Change in present value of deﬁ ned beneﬁ t obligations Deﬁ ned beneﬁ t obligations at beginning of years 1,945 175 1,414 143 Current service costs Past service costs (credits) Interest costs Plan participants’ contributions Actuarial losses (gains) experience Actuarial losses assumptions Acquisition Gains on curtailments and settlements Beneﬁ ts paid Translation differences 27 1 107 7 21 122 – – (128) (33) 4 – 11 – (9) 7 – – (11) 5 21 (4) 103 4 9 245 225 (1) (106) 35 2 – 10 – 3 19 – (1) (10) 9 Deﬁ ned beneﬁ t obligations at end of years 2,069(1) 182(2) 1,945(1) 175(2) Present value of wholly unfunded obligations Present value of wholly and partly funded obligations 144 1,925 182 – 190 1,755 175 – 142 Notes to the group annual ﬁ nancial statements continued 27. Post-employment beneﬁ ts – pensions and other beneﬁ ts (continued) US$ million Change in fair value of plan assets Fair value of plan assets at beginning of years Expected returns on plan assets** Actuarial gains on plan assets Acquisition Employer contributions Plan participants’ contributions Beneﬁ ts paid Losses on curtailments and settlements Translation differences 2010 2009 Deﬁ ned beneﬁ t pension plans Other deﬁ ned beneﬁ t plans Deﬁ ned beneﬁ t pension plans Other deﬁ ned beneﬁ t plans 1,695 114 70 – 66 7 (128) – (16) – – – – 11 – (11) – – – 1,387 104 47 173 54 5 (106) (1) 32 1,695(1) – – – – 10 – (10) – – – Fair value of plan assets at end of years 1,808(1) ** Net of administration costs. Deﬁ cits Unrecognised past service credits (261) – (182) (3) (250) (6) (175) (4) Recognised pension plan liabilities (261)(2) (185)(3) (256)(2) (179)(3) 2010 annual report 143 27. Post-employment beneﬁ ts – pensions and other beneﬁ ts (continued) 2010 2009 2008 Deﬁ ned beneﬁ t pension plans Other deﬁ ned beneﬁ t plans Deﬁ ned beneﬁ t pension plans Other deﬁ ned beneﬁ t plans Deﬁ ned beneﬁ t pension plans Other deﬁ ned beneﬁ t plans 27 1 107 (114) (6) – 4 – 11 – (1) – 21 – 103 (104) 1 – 2 – 10 – (1) (1) 26 1 97 (115) 1 (1) 4 – 11 – (1) – 15(1) 14(2) 21(1) 10(2) 9(1) 14(2) 184 10.9%(3) – – 151 9.9%(3) – – (73)(4) 2(4) (207)(4) (22)(4) (407) (52) (334) (54) US$ million Periodic pension/beneﬁ t costs recognised in income statements Current service costs Past service costs Interest costs Expected returns on plan assets** Amortisation of past service (credits) costs Gains on curtailments and settlements Net periodic pension/beneﬁ t costs charged to cost of sales and selling, general and administrative expenses ** Net of administration costs. Actual returns on plan assets Actual returns on plan assets (%) Amounts recognised in the statements of other comprehensive income Actuarial (losses) gains Cumulative actuarial gains and losses recognised in the statements of other comprehensive income Actuarial (losses) gains Assumptions Financial assumptions are derived by reference to market ﬁ nancial data and established methods recommended by actuaries. In determining the expected long-term return assumption on plan assets, Sappi considers the relative weighting of plan assets to various asset classes, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. Peer data and historical returns are reviewed to check for reasonableness and appropriateness. In addition, Sappi may consult with and consider the opinions of ﬁ nancial and other professionals in developing appropriate return benchmarks. 144 Notes to the group annual ﬁ nancial statements continued 27. Post-employment beneﬁ ts – pensions and other beneﬁ ts (continued) Weighted average actuarial assumptions at balance sheet date Discount rates (pensions) (%) Compensation increases (%)* Expected long-term returns on assets (%) Discount rates (other beneﬁ ts) (%) Initial healthcare costs trend rates (%) ... which gradually reduce to an ultimate rate of (%) ...over a period of (years) Southern Africa 2010 Europe North America Southern Africa 2009 Europe North America 8.25 6.20 9.15 8.25 6.50 6.50 – 4.05 2.40 4.20 – – – – 4.90 3.50 8.00 4.40 7.00 5.00 7 9.00 6.70 9.90 9.00 7.25 7.25 – 4.90 2.60 5.30 – – – – 5.50 3.50 8.00 5.20 8.00 5.00 5 Southern Africa 2010 Europe North America Southern Africa 2009 Europe North America Weighted average actuarial assumptions used to determine pension beneﬁ t cost Discount rates (pensions) (%) Compensation increases (%)* Expected long-term returns on assets (%) Discount rates (other beneﬁ ts) (%) Initial healthcare costs trend rates (%) ... which gradually reduce to an ultimate rate of (%) ...over a period of (years) 9.00 6.70 9.90 9.00 7.25 7.25 – 4.90 2.60 5.30 – – – – 5.50 3.50 8.00 5.20 8.00 5.00 5 9.00 6.45 9.40 9.00 7.00 7.00 – 6.90 3.10 6.75 – – – – 7.60 3.50 8.25 7.60 9.00 5.00 4 * Weighted average of plans that use a compensation assumption. Demographic assumptions (the expected change in membership), are derived by reference to historic and likely future changes in membership and using established methods recommended by actuaries. Changing life expectancy of members (particularly in retirement) can have a signiﬁ cant effect on deﬁ ned beneﬁ t obligations. The group makes provision in its deﬁ ned beneﬁ t obligations for realistic life expectancy by reference to established mortality tables. Further, where recommended by actuaries, extended provisions are included in the obligations to account for expected improvements in life expectancy that are likely to be experienced by future retirees. Illustrating life expectancy The table below shows sample life expectancy for a male aged 60 at ﬁ scal year end, and life expectancy for a male aged 60 in 20 years’ time, taken from mortality tables used in determining regional plan obligations. Southern Africa Belgium* Netherlands Germany Austria Switzerland United Kingdom North America 2010 Life expectancy of male aged 60 at ﬁ scal 2010 Life expectancy of male 18.6 21.5 24.7 23.3 24.3 21.8 25.0 22.1 aged 60 at ﬁ scal 2030 19.5 21.5 26.6 26.2 27.2 21.8 27.0 22.1 * The plan provides a lump sum only on retirement. Life expectancy in retirement is not relevant, but has been included here for illustrative purposes. 2010 annual report 145 27. Post-employment beneﬁ ts – pensions and other beneﬁ ts (continued) Illustrating sensitivity The discount and salary increase rates can have a signiﬁ cant effect on the amounts reported. The table below illustrates the effect of changing key assumptions: 2010 1% increase in discount rate 1% decrease in discount rate 1% increase in salary increase rate 1% decrease in salary increase rate 1% increase in heath- care cost trend rate 1% decrease in health- care cost trend rate US$ million (Decrease) increase in deﬁ ned beneﬁ t pension obligation (234) 284 Increase in aggregate of current service cost and interest cost (Decrease) increase in deﬁ ned other beneﬁ t obligation Increase (decrease) in aggregate of current service cost and interest cost – (19) – 4 21 1 52 – (30) – 17 2 (14) (1) Investment management and strategy Plan ﬁ duciaries set investment policies and strategies for the local trusts. Long-term strategic investment objectives include preserving the funded status of the trust and balancing risk and return while keeping in mind the regulatory environment in each region. The plan ﬁ duciaries oversee the investment allocation process, which includes selecting investment managers, setting long-term strategic targets and rebalancing assets periodically. Target versus actual weighted average allocations (by region) are shown below: 2010 Southern Africa Europe (incl UK) North America Southern Africa 2009 Europe (incl UK) North America % 26 47 5 22 % 27 27 23 5 18 % % 21 60 5 14 % 20 45 19 5 11 38 44 – 18 % 38 6 38 – 18 % 21 57 – 22 % 25 40 17 – 18 % 25 60 6 9 % 20 25 42 5 8 % 38 49 – 13 % 41 6 40 – 13 Weighted average target asset allocation by region Equity securities Debt securities* Real estate Other** Weighted average actual asset allocation by region Equity securities Government debt securities Debt securities Real estate Other** * Target asset allocations do not routinely split between corporate and government bonds. ** Investments that can transcend several asset classes, equity overlay on bond strategy, cash and near cash, funds heavily inﬂ uenced by currency. 146 Notes to the group annual ﬁ nancial statements continued 27. Post-employment beneﬁ ts – pensions and other beneﬁ ts (continued) Expected beneﬁ t payments from pension and other beneﬁ t plans are as follows: US$ million Payable in the year ending September: 2011 2012 2013 2014 2015 Years 2016 – 2020 Deﬁ ned beneﬁ t pension plans Other deﬁ ned beneﬁ t plans 100 99 103 105 108 605 12 13 12 12 12 63 The four tables below show summary data for the current annual period and the previous four annual periods: Aggregate total of present value of the deﬁ ned beneﬁ t obligations, fair value of assets and derived balance sheet liabilities in the deﬁ ned beneﬁ t pension plans US$ million Deﬁ ned beneﬁ t obligations Fair value of assets Deﬁ cits Unrecognised past service (credits) costs Pension asset surplus restrictions Balance sheet liabilities 2010 2,069 1,808 (261) – – (261) 2009 1,945 1,695 (250) (6) – (256) 2008 1,414 1,387 (27) – – (27) 2007 1,607 1,545 (62) 1 – (61) 2006 1,513 1,285 (228) 2 (41) (267) Aggregate total of present value of the deﬁ ned beneﬁ t obligations and derived balance sheet liabilities in the other beneﬁ t plans Deﬁ ned beneﬁ t obligations – deﬁ cits Unrecognised past service credits Balance sheet liabilities (182) (3) (185) (175) (4) (179) (143) (5) (148) Actuarial gains and losses arising in the deﬁ ned beneﬁ t pension plan liabilities and plan assets Plan liabilities gains (losses) Plan assets (losses) gains Net (losses) gains (143) 70 (73) (254) 47 (207) 173 (189) (16) Actuarial gains and losses arising in the other beneﬁ t plan liabilities and plan assets (173) (6) (179) 60 41 101 (164) (6) (170) 73 27 100 Plan liabilities gains (losses) 2 (22) 23 – (1) Reconciliation of gains and losses recognised in other comprehensive income Net (losses) gains from pensions Net gains (losses) from other deﬁ ned beneﬁ ts Net (losses) gains in group statement of comprehensive income (73) 2 (71) (207) (22) (229) (16) 23 7 101 – 101 100 (1) 99 2010 annual report 147 28. Share-based payments The Sappi Limited Share Incentive Trust and The Sappi Limited Performance Share Incentive Trust Shareholders, at prior annual general meetings, ﬁ xed the aggregate number of shares which may be acquired by all participants under the Sappi Limited Share Incentive Trust (Scheme) and The Sappi Limited Performance Share Incentive Trust (Plan) at 19,000,000 shares (equivalent to 7.95% of the shares then in issue). Subsequent to the December 2008 rights offering, this number of shares increased to 42,700,870 shares (still equivalent to 7.95% of the shares in issue). The Sappi Limited Share Incentive Trust (Scheme) Certain managerial employees are eligible to participate in the Scheme. Under the rules of the Scheme, participants (a) may be offered options to acquire ordinary shares (Share options), (b) may be offered the opportunity to acquire ordinary shares (Scheme shares), or (c) may be granted options to enter into agreements with the company to acquire ordinary shares (Allocation shares). In recent years, only Share options have been offered to participants. Under the rules of the Scheme: ■ Share options entitle the participant to purchase one ordinary share per share option. ■ Scheme shares entitle the participant to enter into a loan with the Scheme to acquire Sappi Limited shares at a speciﬁ c issue price. The Scheme shares are registered in the participant’s name and pledged to the Scheme as security for the loan. Upon payment of the loan, the Scheme shares become unsecured Sappi Limited shares owned by the participant. ■ Allocation shares entitle the participant to accept an option to acquire one Allocation share per option. These options must be exercised by the participant within 12 months, failing which the option will automatically lapse. The Allocation shares entitle the participant to pay for one ordinary share per Allocation share. The amount payable by a participant is the closing price at which shares are traded on the JSE Limited on the trading date immediately preceding the date upon which the board authorised the grant of the opportunity to acquire relevant Share options, Scheme shares, or Allocation shares, as the case may be. The Share options, Scheme shares and Allocation shares vest in blocks of 25% per annum on the anniversary date of the offer and expire eight years after the offer date. Only once the shares vest may Share options be exercised by the participants, Scheme shares released from the Scheme to participants and Allocation shares delivered to participants. For allocations prior to November 2004, the Share options, Scheme shares and Allocation shares vested in blocks of 20% per annum on the anniversary date of the offer and expired 10 years after the offer date. The Scheme rules provide that appropriate adjustments are to be made to the rights of participants in the event that the company, inter alia, undertakes a rights offer, a capitalisation issue, or consolidation of ordinary shares or any reduction in its ordinary share capital. The Sappi Limited Performance Share Incentive Trust (Plan) Under the rules of the Plan, participants who are ofﬁ cers and other employees of the company, may be awarded conditional contracts to acquire ordinary shares for no cash consideration. The conditional contracts are subject to performance criteria being met or exceeded after the fourth anniversary date, for ordinary shares to be allotted or transferred to the participants of the Plan. Should the performance criteria not be met, then the number of shares allotted are adjusted downwards from 100% to 75%, or 50%, or none depending on the degree of not meeting the criteria. The performance criteria, which entails a benchmarking of the company’s performance against an appropriate peer group of companies, is set by the board at the offer date, for each conditional share award. The Plan rules provide that appropriate adjustments are to be made to the rights of participants in the event that the company, inter alia, undertakes: a rights offer, or is a party to a scheme of arrangement affecting the structuring of its issued share capital or reduces its share capital. 148 Notes to the group annual ﬁ nancial statements continued 28. Share-based payments (continued) The Sappi Limited Performance Share Incentive Trust (Plan) (continued) The Plan rules also provide that if: (a) the company undergoes a change in control after an allocation date other than a change in control initiated by the board itself; or (b) the persons who have control of the company as at an allocation date, take any decision, pass any resolution or take any action the effect of which is to delist the company from the JSE Limited and the company becomes aware of such decision, resolution, or action; then the company is obligated to notify every Participant thereof on the basis that such Participant may within a period of one month (or such longer period as the board may permit) take delivery of those shares which they would have been entitled to had the Performance Criteria been achieved. Rights offer Following the December 2008 rights offer and in accordance with the provisions of the Scheme and the Plan, adjustments were made in ﬁ scal 2009 to the rights of the Participants so that they were neither better nor worse off than prior to the rights offer. This resulted in additional offers being made to participants in respect of all outstanding offers at the time of the rights offer. As in the case of shareholders that exercised their rights, the Participants of the Plan will be required to pay the rights offer price of ZAR20.27 per share should the shares vest. Similarly, the Participants of the Scheme may only exercise their additional options, awarded as a result of the rights offer, in conjunction with exercising their pre-rights offer options and upon payment of the rights offer price of ZAR20.27 per share. Number of shares Allocations 2010 2009 2009 Total Rights offer Annual 2009 Total During the year, the following offers were made to employees: Share options Allocation shares Conditional share awards Scheme shares Restricted shares 2,889,010 2,192,410 – – 2,565,300 1,815,000 – – – – Share options and conditional share awards declined (65,900) (62,080) 3,847,680 1,345,500 4,725,240 1,577,834 12,000 (63,840) 6,040,090 1,345,500 6,540,240 1,577,834 12,000 (125,920) 5,388,410 3,945,330 11,444,414 15,389,744 2010 annual report 149 28. Share-based payments (continued) Scheme shares, Share options, Restricted shares, Performance shares and Allocation shares activities were as follows during the ﬁ nancial years ended September 2010 and 2009: Scheme shares*** Restricted shares** Share options(1) Performance shares(2)** Weighted average exercise price (ZAR)* Allocation shares(1) Weighted average exercise price (ZAR)* Total shares Outstanding at September 2008 1,351,862 10,000 3,232,700 3,951,100 46.00 1,105,450 98.20 9,651,112 – Offered and accepted 1,577,834 12,000 5,951,970 6,540,240 19.96 1,307,700 20.27 15,389,744 – Paid for/released (75,060) (22,000) (206,140) (165,491) 20.95 (214,660) 30.68 (683,351) – Returned, lapsed and forfeited 5,736 Outstanding at September 2009 2,860,372 – Offered and accepted – Paid for/released – Returned, lapsed and forfeited Outstanding at – – – – – – – – (734,150) (360,289) 41.69 (352,540) 54.12 (1,441,243) 8,244,380 9,965,560 29.33 1,845,950 65.24 22,916,262 2,889,010 2,565,300 – (11,000) 17.93 11.06 – – – – 5,454,310 (11,000) (974,630) (3,207,020) 14.48 (806,800) 77.61 (4,988,450) September 2010 2,860,372 – 10,158,760 9,312,840 27.91 1,039,150 56.15 23,371,122 Exercisable at September 2008 491,300 Exercisable at September 2009 752,600 Exercisable at September 2010 202,040 – – – 1,906,330 5,000 96.97 1,032,300 110.22 3,434,930 4,835,090 5,184,568 – – 55.60 1,845,950 65.24 7,433,640 49.33 1,039,150 56.15 6,425,758 * The options are valued in South African Rands. ** Restricted shares (awarded on an ad-hoc basis to certain individuals on various terms and conditions) and Performance shares are issued for no cash consideration. The value is determined on the day the shares are taken up. *** The number of Scheme shares, which are not subject to credit sales amounts to 2,658,332 (2009: 2,107,772), includes 1,026,794 rights offer Scheme shares taken up at ZAR20.27 per share, included in offered and accepted in the 2009 year. (1) Issued in terms of the Scheme (2) Issued in terms of the Plan 150 Notes to the group annual ﬁ nancial statements continued 28. Share-based payments (continued) The fair value of Scheme shares held at September 2010 was US$13.5 million (September 2009: US$8.1 million). The following table sets out the number of share options outstanding at the end of September, excluding the Scheme shares: 2010 2009 Vesting conditions Vesting date Expiry date Exercise price (ZAR) Share options: 28 March 2002 (ii) 13 February 2003 (ii) 30 December 2003 (ii) – 1,274,980 267,190 1,128,700 1,383,000 267,190 14 January 2004 (ii) 1,208,280 1,311,680 Time Time Time Time Time Time Time Time Time Time (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) 28 March 2010 13 February 2011 30 December 2011 14 January 2012 25 March 2012 13 December 2012 12 December 2015 19 March 2016 22 December 2016 09 December 2017 2,200 2,115,560 1,233,680 555,060 2,093,260 – 25 March 2004 (ii) 13 December 2004 (ii) 12 December 2007 (ii) 19 March 2008 (ii) 22 December 2008 09 December 2009 Performance shares: 13 December 2005 (ii) 08 August 2006 (ii) 15 January 2007 (ii) 29 January 2007 (ii) 31 May 2007 (ii) 02 July 2007 (ii) 10 September 2007 (ii) 12 December 2007 (ii) 19 March 2008 (ii) 23 December 2008 09 December 2009 2,200 1,993,900 1,168,560 531,740 1,990,850 2,760,210 – – – 110,000 2,960,540 220,000 55,000 1,155,000 451,000 1,815,000 2,546,300 3,030,060 Performance 13 December 2009 110,000 Performance 08 August 2010 11,000 Performance 31 December 2009 110,000 Performance 29 January 2011 3,008,500 Performance 31 May 2011 220,000 Performance 02 July 2011 55,000 Performance 10 September 2011 1,155,000 Performance 12 December 2011 451,000 Performance 12 March 2012 1,815,000 Performance 22 December 2012 – Performance 09 December 2013 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 77.97 62.34 47.08 47.08 50.42 46.51 52.57 55.97 35.50 33.85 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 20,510,750 20,055,890 (i) These vest over four or ﬁ ve years depending on the date of allocation. (ii) During the 2009 year there was a rights issue of 6 shares for every 5 shares held at ZAR20.27 per share. According to the rules of the Scheme, this was also offered to participants. Not all the participants took up their rights. 2010 annual report 151 28. Share-based payments (continued) The following assumptions have been utilised to determine the fair value of the shares granted in the ﬁ nancial period in terms of the Scheme and the Plan: Date of grant Type of award Share price at grant date Strike price of share Vesting period Vesting conditions Life of options Market related vesting conditions Percentage expected to vest Number of shares offered Volatility Risk free discount rate Expected dividend yield Expected percentage of issuance Model used to value Fair value of option Issue 35 Issue 35 Issue 35 09 Dec 09 Normal Option ZAR32.85 ZAR33.85 4 years 09 Dec 09 Performance US$4.34 – 4 years 09 Dec 09 Performance US$4.34 – 4 years Cash Flow Return Proportionately Market related – on Net Assets over time 8 years N/A N/A 2,889,010 44.1% 7.3% 2.5% 95% Modiﬁ ed binomial ZAR13.51 relative to peers relative to peers N/A Yes 41.0% 1,282,650 54.9% 2.1% (US yield) 1.7% 95% Monte-carlo ZAR22.25 N/A No 100% 1,282,650 N/A N/A 1.7% 95% Market price ZAR24.64 Volatility has been determined with reference to the historic volatility of the Sappi share price over the expected period. Share options, Allocation shares, Restricted shares and Performance shares to executive directors, which are included in the above ﬁ gures, are as follows: At beginning of year Share options, Restricted shares and Performance shares granted for rights issue Share options, Restricted shares and Performance shares granted Share options and Allocation shares exercised or declined Shares removed on resignation, retirement of directors or forfeited At end of year 2010 2009 Number of options/ shares Number of options/ shares 968,000 – 315,000 – (195,800) 339,000 406,800 242,000 (16,500) (3,300) 1,087,200 968,000 152 Notes to the group annual ﬁ nancial statements continued 28. Share-based payments (continued) The following table sets forth certain information with respect to the 1,087,200 Share options and Performance shares granted by Sappi to executive directors: Issue date 13 February 2003 30 December 2003 13 December 2004 02 July 2007* 12 December 2007* 22 December 2008* 09 December 2009* Number of options/shares** 33,000 39,600 39,600 220,000 198,000 242,000 315,000 1,087,200 Expiry date 13 February 2011 30 December 2011 13 December 2012 02 July 2011 12 December 2011 13 December 2012 09 December 2013 Exercise price (ZAR)** 62.34 47.08 46.51 – – – – * Performance shares. ** Adjusted for the Share options, Restricted shares and Performance shares granted as a result of the rights issue. Refer to the compensation report for further information on Directors participation in the Scheme and the Plan. No new loans have been granted to the executive directors since 28 March 2002. Broad-based Black Economic Empowerment transaction (BBBEE Transaction) In June 2010, Sappi completed a Broad-based Black Economic Empowerment (“BBBEE”) transaction (the “BBBEE Transaction”). The South African government has through the years promulgated various pieces of legislation to increase the participation of Historically Disadvantaged South Africans (“HDSAs”) in the South African economy and, through BEE legislation, formalised the country’s approach in this regard. In April 2006, Sappi announced a BEE transaction (the “Plantation BEE Transaction”) with Lereko Property Company (Proprietary) Limited (“LPC”), a BEE company set up to house a consortium consisting of Lereko Investments (Proprietary) Limited (“Lereko Invesments”), AMB Capital Limited (“AMB Capital”) and Malibongwe Women Development Trust (“Malibongwe”) (collectively, the “Strategic Partners”), pursuant to which LPC acquired a 25% undivided share in Sappi’s South African plantation land, excluding the value of the plantations, owned by Sappi and/or Sappi Manufacturing, coupled with the right to develop the land not utilised for forestry operations. Sappi Manufacturing retained the right of use over all the land under the underlying arrangements. As part of the Plantation BEE Transaction, 30% of LPC was set aside for the beneﬁ t of certain categories of Sappi’s South African employees who did not participate in any Company share incentive scheme. The balance of the shareholding in LPC was to be held by Lereko Investments (46.19%), Malibongwe (10.14%) and AMB Capital (13.67%). However, the Plantation BEE Transaction did not meet Sappi’s undertakings under the Forestry Charter gazetted in June 2009 (which sets the objectives and principles for BEE in the forestry industry and includes the BEE scorecard and targets to be applied, as well as certain undertakings by government and South African forestry companies to assist the forestry industry to achieve its BEE targets). Accordingly, Sappi decided to unwind the Plantation BEE Transaction, which resided at a South African subsidiary level and to implement the BBBEE Transaction, a new sustainable transaction of equivalent value at a holding company level using its listed securities. 2010 annual report 153 28. Share-based payments (continued) Broad-based Black Economic Empowerment transaction (BBBEE Transaction) (continued) Sappi views BBBEE as a key requirement for sustainable growth and social development in South Africa. The BBBEE Transaction enabled Sappi to meet its BEE targets in respect of BEE equity ownership. The BBBEE Transaction comprised two distinct parts. The ﬁ rst part entailed the issue of ordinary shares to the Strategic Partners and the Sappi employees who were to be participants in the Plantation BEE Transaction, as part of the unwinding of the rights from that transaction. The second part consisted of the creation and issuance of a new class of unlisted equity shares referred to as “A” ordinary shares. The “A” ordinary shares were issued at their par value of ZAR1 to a trust for the beneﬁ t of certain Sappi employees including HDSAs (the “ESOP Trust”), a trust for the beneﬁ t of certain Sappi managers that are HDSAs (the “MSOP Trust”) and a trust for the beneﬁ t of communities surrounding the major mills and/or plantations operated by Sappi in South Africa (the “Sappi Foundation Trust”, and together with the ESOP Trust and the MSOP Trust, the “BBBEE Trusts”). The issuance of the “A” ordinary shares was ﬁ nanced through notional non-interest bearing loans extended by Sappi to the BBBEE Trusts. The BBBEE Transaction resulted in the BBBEE Trusts and the Strategic Partners holding, collectively, ordinary and “A” ordinary shares equivalent to 4.5% of the share capital of Sappi Limited, which corresponds to an effective 30% interest in Sappi’s South African business under the Forestry Charter and BEE legislation in general. The transaction has resulted in potentially 4.5% of the issued share capital of Sappi being held as follows: ■ Sappi’s South African Employees (62.5%); ■ South African Black Managers (15%); ■ Strategic partners (12.5%); and ■ Communities surrounding the South African mill operations and plantations (10%). The total value of the transaction, based on the 30 day volume weighted average share price (VWAP) of Sappi as at Friday, 5 February 2010 of ZAR33.50, amounted to ZAR814 million and required the issue of 24.3 million shares, made up of 4.3 million ordinary shares and 20.0 million of a new class of equity shares, “A” ordinary shares. Ordinary shares The strategic partners agreed to transfer the value created through their shareholding in LPC in the Plantation BEE Transaction into fully paid up ordinary shares. The value created through the entitlement of 30% of LPC which was set aside for the beneﬁ t of certain categories of Sappi’s South African Employees was converted into fully paid up ordinary shares and are held in the ESOP Trust. After the completion of the above transactions, Sappi became the sole shareholder of LPC and regained 100% ownership of Sappi’s South African plantation land. The fair value attributable to the strategic partners and certain categories of South African employees on the unwinding of the Plantation BEE Transaction was determined by reference to the fair value of LPC’s 25% undivided share in Sappi South Africa’s plantation land. The value attributable to the strategic partners for their shareholding in LPC was ZAR102 million and the portion attributable to certain categories of South African employees, which is held through the ESOP Trust, for their 30% entitlement of LPC was ZAR43 million. These values resulted in the issue of the following number of ordinary shares to the Strategic Partners and the ESOP Trust based on Sappi’s 30 day VWAP as at Friday, 5 February 2010 (being ZAR33.50): Entity Strategic partners: Lereko Investments Malibongwe AMB Employees (through the ESOP Trust) Total Ordinary share allocation Value of shares issued ZAR million Value of shares* issued US$ million 1,971,693 432,842 643,221 3,047,756 1,280,597 4,328,353 66 15 21 102 43 145 9 2 3 14 5 19 * The group has recognised the issue of ordinary shares as payment to the Strategic Partners and certain categories of South African employees on the unwinding of the Plantation BEE Transaction as a share-based payment expense. 154 Notes to the group annual ﬁ nancial statements continued 28. Share-based payments (continued) “A” Ordinary shares The transaction resulted in the formation of the ESOP Trust, the Management Share Option Plan Trust (MSOP Trust or MSOP), whose beneﬁ ciaries are the black managers, and the Sappi Foundation Trust, whose beneﬁ ciaries include the growers and communities in the geographic areas where Sappi’s Southern African business has operations. The “A” ordinary shares were allocated as follows: Entity ESOP MSOP Sappi Foundation Total Number of “A” Ordinary Shares Value of shares issued ZAR million Value of shares* issued US$ million 13,889,195 3,642,969 2,429,312 19,961,476 465 122 82 669 66 17 12 95 * The group recognised a share-based payment expense of US$4 million that related to the “A” Ordinary shares that were awarded to the Sappi Foundation, MSOP and ESOP trusts. The following assumptions were utilised to determine the fair value of the “A” Ordinary shares granted: Base price for hurdle rate price Share price hurdle rate Hurdle rate price Dividend yield (unadjusted) Volatility Dividend payout Straight-line dividend payout rate Employee turnover (annual) Management turnover (annual) Model used to value 32.50 9.1% 75.34 3.0% 40.0% Straight-line vesting 50.0% 7.8% 11.3% Black Scholes Model The ESOP and MSOP trusts have been set up with rules that detail the way in which the shares are allocated and how they are forfeited. The vesting schedule for the MSOP and ESOP is illustrated below: Completed months of service after effective date 0 – 35 36 – 48 49 – 60 61 – 72 73 – 84 85 – 96 97 – 108 109 – Termination Date Refer to note 17 for further details regarding the “A” ordinary shares. Incremental vesting of entitlements (%) Cumulative vesting of entitlements (%) – 40 10 10 10 10 10 10 – 40 50 60 70 80 90 100 2010 annual report 155 29. Financial instruments The group’s ﬁ nancial instruments consist mainly of cash and cash equivalents, accounts receivable, certain investments, accounts payable, borrowings and derivative instruments. Introduction The principal risks to which Sappi is exposed through ﬁ nancial instruments are: a) market risk (the risk of loss arising from adverse changes in market rates and prices), arising from: ■ interest rate risk ■ currency risk ■ commodity price risk b) credit risk c) liquidity risk The group’s main ﬁ nancial risk management objectives are to identify, measure and manage the above risks as more fully discussed under the individual risk headings below. Sappi’s Group Treasury is comprised of two components: Sappi International, located in Brussels, which manages the group’s non-South African treasury activities and, for local regulatory reasons, the operations based in Johannesburg which manage the group’s southern African treasury activities. These two operations collaborate closely and are primarily responsible for the group’s interest rate, foreign currency, liquidity and credit risk (insofar as it relates to deposits of cash, cash equivalents and ﬁ nancial investments). Credit risk (insofar as it relates to trade receivables) is primarily managed regionally but is co-ordinated on a group basis, whilst commodity price risk is managed regionally. The group’s Limits of Authority framework delegates responsibility and approval authority to various ofﬁ cers, committees and boards based on the nature, duration and size of the various transactions entered into by, and exposures of, the group including the exposures and transactions relating to the ﬁ nancial instruments and risks referred to in this note. a) Market risk Interest rate risk Interest rate risk is the risk that the value of a borrowing or an investment will change due to a change in the absolute level of interest rates, the spread between two rates, the shape of the yield curve or any other interest rate relationship. The group is exposed to interest rate risk as it borrows funds at both ﬁ xed and ﬂ oating interest rates. The group monitors market conditions and may utilise approved interest rate derivatives to alter the existing balance between ﬁ xed and variable interest rate loans in response to changes in the interest rate environment. Hedging of interest rate risk for periods greater than one year is only allowed if income statement volatility can be minimised by means of hedge accounting, fair value accounting or other means. The group’s exposure to interest rate risk is set out below. Interest-bearing borrowings The following table provides information about Sappi’s current and non-current borrowings that are sensitive to changes in interest rates. The table presents cash ﬂ ows by expected maturity dates and the estimated fair value of borrowings. The average ﬁ xed effective interest rates presented are based on weighted average contract rates applicable to the amount expected to mature in each respective year. Forward looking average variable effective interest rates for the ﬁ nancial years ended September 2010 and thereafter are based on the yield curves for each respective currency as published by Reuters on 26 September 2010. The information is presented in US$, which is the group’s reporting currency. 156 Notes to the group annual ﬁ nancial statements continued 29. Financial instruments (continued) Expected maturity date (US$ equivalent in millions) 2011 2012 2013 2014 2015 2016+ US Dollar Fixed rate debt Average interest rate (%) Variable rate debt(1) Average interest rate (%) Euro Fixed rate debt Average interest rate (%) Variable rate debt(2) Average interest rate (%) Rand Fixed rate debt Average interest rate (%) Variable rate debt(3) Average interest rate (%) Total Fixed rate debt Average interest rate (%) Variable rate debt Average interest rate (%) Fixed and variable Current portion Long term portion – – 136 2.31 80 7.79 411 2.61 64 9.19 – – 144 8.41 547 2.53 691 513 6.58 – – 126 8.52 22 4.00 231 11.11 – – 870 8.06 22 4.00 892 Total carrying value 2010 Fair value 2009 Carrying value 2009 Fair value 1,015 1,133 1,214 1,281 – – – – – 222 7.47 – – 3 8.50 136 2.31 136 868 1,066 2.17 2.04 10.80 – – – – – – 453 2.74 536 10.36 – – 453 556 – 8.12 128 2.08 1,048 11.09 400 2.89 536 10.30 1 10.55 128 1,290 399 524 1 225 7.40 – – 2,419 2,755 2,798 3,095 9.74 589 2.64 589 9.65 529 2.72 528 225 3,008 3,344 3,327 3,623 691 2,317 732 2,612 601 2,726 602 3,021 – – – – 126 8.53 20 4.00 205 9.76 – – 331 9.29 20 – 280 12.85 – – 533 12.37 – – 29 – – 7 – – 7 11.00 11.67 – – 842 – – 7 12.48 11.17 – – 351 842 Total interest-bearing borrowings (refer note 20) 3,008 3,344 3,327 3,623 (1) The US Dollar ﬂ oating interest rates are based on the London Inter-bank Offered Rate (LIBOR). (2) The Euro ﬂ oating interest rates are based on the European Inter-bank Offered Rate (EURIBOR). (3) The Rand ﬂ oating interest rates are predominately based on the Johannesburg Inter-bank Agreed rate (JIBAR). The fair value of non-current borrowings is estimated by Sappi based on the rates from market quotations for non- current borrowings with ﬁ xed interest rates and on quotations provided by internationally recognised pricing services for notes, exchange debentures and revenue bonds. The above mentioned fair values include Sappi’s own credit risk. Please refer to the sensitivity analysis regarding interest rate risk for additional information regarding Sappi’s rating. The range of interest rates in respect of all non-current borrowings comprising both ﬁ xed and ﬂ oating rate obligations, is between 4% and 12.48% (depending on currency). At September 2010, 80% of Sappi’s borrowings were at ﬁ xed rates of interest, and 20% were at ﬂ oating rates. Fixed rates of interest are based on contract rates. A detailed analysis of the group’s borrowings is presented in note 20. 2010 annual report 157 29. Financial instruments (continued) Interest rate derivatives Sappi uses interest rate options, caps, swaps (IRS) and interest rate and currency swaps (IRCS) as a means of managing interest rate risk associated with outstanding debt entered into in the normal course of business. Sappi does not use these instruments for speculative purposes. Interest rate derivative ﬁ nancial instruments are measured at fair value at each reporting date with changes in fair value recorded in proﬁ t or loss for the period or in other comprehensive income, depending on certain hedge designations carried out by the group in a documented hedging strategy. In August 2009, Sappi entered into a new ﬁ xed for ﬁ xed interest and currency swap, which has been designated as a cash ﬂ ow hedge of future cash ﬂ ows linked to ﬁ xed rate debt denominated in foreign currency. The swap corresponds to the underlying US$300 million Senior Secured Notes due 2014. The swap converts all future US$ cash ﬂ ows to EUR. The effective gains and losses from changes in fair value of these derivatives are recorded in other comprehensive income. These accumulated gains and losses will be recycled to proﬁ t or loss in the same line as the hedged item at the moment the hedged item affects the income statement (interest expense and foreign currency revaluation). In order to measure hedge effectiveness, a hypothetical derivative with identical critical terms as the hedged item, has been built as a perfect hedge. The changes in fair value of the actual derivatives are compared with the changes in fair value of the hypothetical derivative. As at September 2010 the effectiveness tests for the above mentioned hedges showed a 100% hedge effectiveness. The swaps showed a total positive fair value of US$19 million, the positive fair value of the currency leg of the swap of US$16 million was booked to proﬁ t or loss to offset the corresponding foreign currency unrealised gain of the revaluation of the underlying hedged item, whereas the remaining positive fair value of the interest leg of the swap of US$3 million was deferred in equity. The interest rate and currency swap contract converting US$ cash ﬂ ows into GBP and ﬁ xed US$ interest rates into ﬁ xed GBP interest rates matured on 31 December 2009. This derivative was not designated as a hedge in a documented hedge strategy. See details of the swap instruments in the table below: US$ million Interest rate Maturity date 2010 2009 Nominal value Fair value* favourable Nominal value Fair value* favourable (unfavourable) IRCS IRCS US Dollar 6.30% into GBP 6.66% December 2009 US Dollar 12.00% into EUR 12.19% August 2014 – 300 117 300 – 19 19 10 (24) (14) * This refers to the carrying value. The fair value of the IRCS is the estimated amount that Sappi would pay or receive to terminate the agreement at the balance sheet date, taking into account current interest rates and the current creditworthiness of the counterparties considering the speciﬁ c relationships of the Sappi group with those counterparties. However, this amount excludes the possible breakage and other fees which would be incurred in case of a sale before the maturity date. 158 Notes to the group annual ﬁ nancial statements continued 29. Financial instruments (continued) Summary sensitivity: analyses external interest rate derivatives The following is a sensitivity analysis of the impact on proﬁ t or loss in US$ million of a change in fair value of interest rate derivative instruments due to changes in the interest rate basis points (bps). The sensitivity analysis of ﬂ oating rate debt, is carried out separately (see below). IRCS converting ﬁ xed US$ rates into EUR ﬁ xed rates: Scenario name Base value Scenario value Change % Change – 50bps EURIBOR-6M + 50 bps EURIBOR-6M Total (403.6) (403.6) (410.3) (397.0) (1.7) 1.6 (6.7) 6.6 (0.1) Scenario name Base value Scenario value Change % Change – 50 bps USD-LIBOR-3M + 50 bps USD-LIBOR-3M Total 422.3 422.3 429.4 415.4 1.7 (1.6) 7.1 (6.9) 0.2 The derivative converts ﬁ xed US$ interest payments of 12% into ﬁ xed EUR interest coupons, as well as the redemption of principal amounts at maturity. The fair value of the instrument is subject to changes of both the inherent exchange rates and interest rates. Fair value changes of the derivative caused by currencies are neutralised by currency changes in the underlying external debt. At the end of ﬁ scal 2010, the net fair value of the derivative amounted to a positive amount of US$18.7 million (Gross “Base Values” in the table above: negative US$403.6 million for the EUR leg and US$422.3 million for the US$ leg) of which a positive amount of US$15.4 million was due to the exchange rate movement between inception and the reporting date. This amount is compensated by the opposite movement of the underlying US$ external debt and therefore has no impact on proﬁ t or loss. The portion of the fair value due to interest rate movements amounts to a positive value of US$3.3 million and has been recorded in other comprehensive income. This value will reduce to zero at maturity. For the period outstanding, the table above shows the impact that a shift of 50 bps on the LIBOR/EURIBOR curve would have on the fair value. A decrease in the US$ LIBOR adds to the fair value, as does an increase of the EURIBOR. When the EUR and the US$ interest rates move the same way, the one roughly compensates the other. If the rates would drift in opposite directions, this would have an impact of approximately US$13.6 million for a shift of 50 bps. The largest shift experienced over the last twelve-month period was a negative net shift of 0.84%, due to a decrease in US$ rates of 0.81% and a decrease in the EUR rates of 1.65%. Applied to the fair value as at the end of ﬁ scal 2010, this would have resulted in a negative change in fair value of US$11.1 million. Scenario name Base value Scenario value Change % Change – 81 bps USD-LIBOR-3M – 165 bps EURIBOR-6M Total 422.3 (403.6) 433.8 (426.2) 11.5 (22.6) (11.1) 2.7 (5.6) The above analysis measures the impact on proﬁ t or loss that a change in fair value of the interest rate derivatives would have if the speciﬁ ed scenarios were to occur. 2010 annual report 159 29. Financial instruments (continued) Sensitivity analysis: interest rate risk – in case of a credit rating downgrade of Sappi The following table shows the sensitivity of securitisation debt to changes in the group’s own credit rating. The securitisation agreement stipulates that if the company were downgraded below our current grading, an additional margin would be agreed between the bank and the company. In this respect we assumed a hypothetical increase of 1.5%. Please note that the change in value of the securitisation debt is included in the sensitivity analysis of ﬂ oating rate debt in the table below: Securitisation in Europe and Hong Kong US$ million Europe Hong Kong Sub-total Impact calculated on total portfolio amounts to Impact on income statement of a one notch downgrade below BB-credit rating 5 1 6 Notional 311 75 386 1.55% The pricing of the securitisation contracts in Europe and Hong Kong would be impacted as set out in the table above if the company were to be downgraded below the current rating. Based on the existing agreement, the US securitisation arrangement would not be impacted by a possible downgrade, as there are sufﬁ cient other credit enhancements to mitigate the co-mingling risk. The table below shows the sensitivity of certain ﬁ xed rate debt to changes in the group’s own credit rating. The agreements of these speciﬁ c external loans stipulate that if the company were downgraded below our current grading, an additional margin would be added to the contractual funding rate. External loan agreements sensitive to the group’s own credit rating US$ million Commitment fee on unused revolving credit facility Interest on utilised bank syndicated loan Interest on utilised bank loan Sub-total Impact calculated on total portfolio amounts to Sensitivity analysis: interest rate risk of ﬂ oating rate debt Notional 282 432 34 748 0.53% US$ million Total debt Ratio ﬁ xed/ﬂ oating to total debt Total Fixed rate Floating rate 3,008 2,419 80% 589 20% Impact on income statement of downgrade below BB “secured” credit rating 1 3 – 4 Impact on income statement of 50 bps interest 3 The ﬂ oating rate debt represents 20% of total debt. If interest rates were to increase (decrease) by 50 bps the ﬁ nance cost on ﬂ oating rate debt would increase (decrease) by US$3 million. 160 Notes to the group annual ﬁ nancial statements continued 29. Financial instruments (continued) Currency risk Sappi is exposed to economic, transaction and translation currency risks. The objective of the group in managing currency risk is to ensure that foreign exchange exposures are identiﬁ ed as early as possible and actively managed. ■ Economic exposure consists of planned net foreign currency trade in goods and services not yet manifested in the form of actual invoices and orders; ■ Transaction exposure arises due to transactions entered into, which result in a ﬂ ow of cash in foreign currency, such as payments under foreign currency long and short-term loan liabilities, purchases and sales of goods and services, capital expenditure and dividends. Where possible, commercial transactions are only entered into in currencies that are readily convertible by means of formal external forward exchange contracts; and ■ Translation exposure arises when translating the group’s assets, liabilities, income and expenditure into the group’s presentation currency. Borrowings are taken out in a range of currencies which are based on the group’s preferred ratios of gearing and interest cover based on a judgement of the best ﬁ nancial structure for the group. On consolidation this gives rise to translation exposure which is not hedged. In managing currency risk, the group ﬁ rst makes use of internal hedging techniques with external hedging being applied thereafter. External hedging techniques consist primarily of foreign currency forward exchange contracts and currency options. Foreign currency capital expenditure on projects must be covered as soon as practical (subject to regulatory approval). Currency risk analysis In the preparation of the currency risk analysis the derivative instrument has been allocated to the currency which the underlying instrument has been hedging. 2010 US$ million Financial assets Other non-current assets Non-current derivative ﬁ nancial assets** Trade and other receivables Current derivative ﬁ nancial assets** Cash and cash equivalents Total Total in scope* 105 19 889 15 792 38 19 777 15 792 422 296 15 337 1,641 1,072 Financial liabilities Non-current interest-bearing borrowings Current interest-bearing borrowings Overdraft Current derivative ﬁ nancial liabilities** 2,317 691 5 3 2,317 691 5 3 Trade and other payables 1,270 991 1,015 136 4 (2) 221 USD EUR ZAR GBP Other 2 13 22 (403) 366 – 320 296 830 490 1 (1) 436 – 24 – 128 174 472 65 – 6 286 829 – – 56 – 1 57 – – – – 18 18 39 1 – 35 – 6 42 – – – – 30 30 12 Foreign exchange gap (2,366) (302) (1,460) (655) 4,007 1,374 1,756 2010 annual report 161 USD EUR ZAR GBP Other 29. Financial instruments (continued) Currency risk analysis (continued) 2009 US$ million Financial assets Other non-current assets Non-current derivative ﬁ nancial assets** Trade and other receivables Current derivative ﬁ nancial assets** Cash and cash equivalents Financial liabilities Non-current interest-bearing borrowings Non-current derivative ﬁ nancial liabilities** Current interest-bearing borrowings Overdraft Current derivative ﬁ nancial liabilities** Trade and other payables Total Total in scope* 101 10 858 10 770 43 10 734 10 770 1,567 2 (120) 277 10 299 468 11 – 339 – 383 733 29 – 22 – 84 135 2,726 2,726 1,154 1,068 504 24 601 19 14 1,116 24 601 19 14 860 (429) 187 3 2 452 380 5 – 182 402 4,244 1,099 2,307 1 34 – – 216 755 – 130 45 – – 175 – – – 3 11 19 33 1 – 51 – 4 56 – – – 8 1 41 50 6 Foreign exchange gap (2,677) (631) (1,574) (620) 142 * This refers to items that are within the scope of IAS 39. ** The amount disclosed with respect to derivative instruments, reﬂ ects the currency which the derivative instrument is covering. The above table does not indicate the group’s foreign exchange exposure, it only shows the ﬁ nancial instruments assets and liabilities classiﬁ ed per underlying currency. The group’s foreign currency forward exchange contracts at September 2010 are detailed below: US$ million Foreign currency Bought: Sold: 2010 2009 Contract amount (Notional amount) Fair value (unfavourable) favourable Contract amount (Notional amount) Fair value (unfavourable) favourable US Dollar Euro ZAR US Dollar Euro ZAR 7 43 – (232) (98) (5) (285) – – – 15 (2) – 13 473 213 – (132) (16) (1) 537 (13) (1) – 9 – – (5) 162 Notes to the group annual ﬁ nancial statements continued 29. Financial instruments (continued) The fair value of foreign currency contracts has been computed by the group based upon the market data valid at the end of ﬁ scal 2010. All forward currency exchange contracts are valued at fair value with the resultant proﬁ t or loss included in the net ﬁ nance costs for the period. Forward exchange contracts are used to hedge the group from potential unfavourable exchange rate movements that may occur on recognised ﬁ nancial assets and liabilities or planned future commitments. The foreign currency forward exchange contracts have different maturities, with the most extended maturity date being January 2011. As at the year end there was an open exposure of US$14.4 million which has since been hedged. Sensitivity analysis – (loss) gain Base currency (US$ million) EUR GBP CHF SEK JPY ZAR Other currencies Total Exposure +10 % –10 % (15.8) 5.8 11.6 0.8 0.2 (2.5) (14.5) (14.4) (1.4) 0.5 1.1 0.1 – (0.3) (1.3) (1.3) 1.8 (0.6) (1.3) (0.1) – 0.3 1.5 1.6 Based on the exposure as at the end of ﬁ scal 2010, if the foreign currency rates had moved 10 % upwards or downwards compared to the closing rates, the result would have been impacted by a loss of US$1.3 million (increase of 10%) or a gain of US$1.6 million (decrease of 10%). During 2010, we have contracted non-deliverable average rate foreign exchange transactions for a total notional value of US$65 million which were used as an overlay hedge of export sales. Since these contracts have all matured before the end of ﬁ scal 2010, these constitute non-representative positions. The total impact on proﬁ t or loss amounts to a gain of US$2.4 million. Commodity price risk Commodity price risk arises mainly from price volatility and threats to security of raw material supply and other inputs to the production process. A combination of contract and spot deals are used to manage price volatility and contain costs. Contracts are limited to the group’s own use requirements. The group aims to improve its understanding of the direction, magnitude and duration of future commodity price changes and to develop commodity speciﬁ c expertise. During 2010, we have contracted two pulp swaps in Europe for a limited volume of pulp (6,000 tons for each swap). Sappi Fine Paper Europe (“SFPE”) buys pulp from external suppliers at a variable price consisting of a reference price linked to the Pix Pulp index which is adjusted with a premium depending on the pulp market conditions. As SFPE expected pulp prices to increase, it was decided to ﬁ x the pulp price for one year by entering into a pulp swap whereby the variable price was swapped for an annual ﬁ xed price. 2010 annual report 163 29. Financial instruments (continued) The group’s pulp swap contracts at the end of ﬁ scal 2010 are detailed below: US$ million Base currency Bleached Hardwood Kraft Pulp (BHKP) bought Northern Bleached Softwood Kraft (NBSK) bought US Dollar Euro 2010 2009 Contract amount (notional amount) Fair value favourable (unfavourable) Contract amount (notional amount) Fair value (unfavourable) favourable 1 2 3 0.2 (0.1) 0.1 – – – – – – b) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a ﬁ nancial loss to the group. The group faces credit risk in relation to trade receivables, cash deposits and ﬁ nancial investments. Credit risk relating to trade debtor management is the responsibility of regional management and is co-ordinated on a group basis. The group’s objective in relation to credit risk is to limit the exposure to credit risk through speciﬁ c group-wide policies and procedures. Credit control procedures are designed to ensure the effective implementation of best trade receivable practices, the comprehensive maintenance of all related records, and effective management of credit risk for the group. The group assesses the credit worthiness of potential and existing customers in line with the credit policies and procedures. Appropriate collateral is obtained to minimise risk. Exposures are monitored on an ongoing basis utilising various reporting tools which highlight potential risks. In the event of deterioration of credit risk, the appropriate measures are taken by the regional credit management. All known risks are required to be fully disclosed, accounted for, and provided for as bad debts in accordance with the applicable accounting standards. Quantitative disclosures on credit risk are included in note 16 of the annual ﬁ nancial statements. On average 60% of our trade receivables are credit insured. 164 Notes to the group annual ﬁ nancial statements continued 29. Financial instruments (continued) Hedge accounting 1. Fair value hedges Until June 2009, the group had fair value hedges which qualiﬁ ed for hedge accounting. As the hedging instrument was sold in 2009 hedge accounting was ceased. The result of the sale of the hedging instrument was booked to the income statement in 2009. The ﬁ nal life-to-date fair value adjustment of the underlying bonds on the date of the sale of the swaps is amortised over the life of the initial hedge designation period and amounted to US$46 million. In the course of 2010, US$136 million of the underlying bonds have been early redeemed and the corresponding amortisation has been booked immediately into the income statement. In consequence the impact on the proﬁ t and loss account will be as follows: Fiscal period 4th quarter 2009 2010 2011 2012 Total US$ million 1 21 12 12 46 As at September 2010, the group does not have any outstanding fair value hedges. The following is an analysis of the impact on pre-tax proﬁ t and loss for the period based on the consolidated accounts translated at average rates: Favourable (unfavourable) Fair value hedges Net proﬁ t or loss impact of sale of interest rate swaps Realised result on sold hedging instruments Reversal of life to date fair value adjustment on hedging instruments Reversal unrealised interest accrual on IRS Amortisation Residual ineffectiveness – gain on hedging instruments – loss on hedged item Total 2010 2009 at average rate US$ million at average rate US$ million – – – – 21 – – – 21 (18) 52 (59) (11) – (9) 41 (50) (27) 2010 annual report 165 29. Financial instruments (continued) 2. Cash ﬂ ow hedges In August 2009, Sappi entered into a ﬁ xed for ﬁ xed interest and currency swap, which has been designated as a cash ﬂ ow hedge of future cash ﬂ ows linked to ﬁ xed rate debt denominated in foreign currency. The swap corresponds to the underlying US$300 million Senior Secured Notes due 2014. The swap converts all future US$ cash ﬂ ows into EUR. The effective gains and losses from changes in fair value of these derivatives are recorded in other comprehensive income. These accumulated gains and losses will be recycled to proﬁ t or loss in the same line as the hedged item at the moment the hedged item affects proﬁ t or loss (interest expense and foreign currency revaluation). Sappi uses the REVALHedgeRx module (REVAL), a web-based application providing treasury and risk management solutions supplied by Reval.Com, Inc., a ﬁ nancial technology company based in New York, to assess the fair value of the IRCS and to measure the effectiveness of the cash ﬂ ow hedge relationship. At inception and at the beginning of each quarterly reporting period, the future effectiveness of the hedge relationship is assessed using the critical terms match. In order to measure retrospective hedge effectiveness, a hypothetical derivative with identical critical terms as the hedged item, has been built as a perfect hedge. The periodic dollar-offset retrospective hedge effectiveness test is based on the comparison of the actual past periodical changes in fair value between the hedging derivative and the hypothetical derivative. The ratio of the periodic change in fair value of the hedging instrument since inception or since the last quarterly measurement divided by the periodic change in fair value of the hypothetical derivative since inception or since the last quarterly measurement for the hedge falls with the range of 80% to 125%. If however, both changes in fair value are less than 1% of the notional amount of the IRCS, these changes in fair value are considered to be both immaterial and the hedge effectiveness test is met. The counterparties of the hedging instruments are tested for creditworthiness on a quarterly basis. If the credit risk of a given counterparty would fall under the minimum required rating, any positive fair value of the hedging instrument would be adjusted to cater for the additional credit risk. This would not affect the hypothetical derivative. 3. Net investment hedges In February 2010, Sappi designated a hedge of a net investment for an indeterminate period of Sappi Papier Holding (“SPH”) in SD Warren Holdings Corporation (“SFPNA”) including all its subsidiaries and incorporating all net assets. The hedged risk is the currency risk associated with the spot re-translation of the net assets of the foreign operation into the functional currency of the consolidating parent entities at the level of which the hedge is designated, ie, SPH for USD-EUR spot exchange risk and Sappi Ltd for USD-ZAR spot exchange risk. The hedging instrument is a non-derivative foreign currency external debt. At inception of the hedge both, the net investment in the foreign operation (as hedged item) and the foreign currency denominated debt (as hedging instrument), have been recorded at the spot rate in effect on the hedge designation date. Exchange differences linked to the subsequent revaluation of the foreign currency debt in the books of the entity holding the debt are deferred in other comprehensive income to the extent effective until the foreign operation is disposed of or liquidated. They are recognised in the income statement on disposal or liquidation as part of the gain or loss on disposal. 166 Notes to the group annual ﬁ nancial statements continued 29. Financial instruments (continued) 3. Net investment hedges (continued) Ineffectiveness can only occur if the net investment carrying value of the foreign operation would fall below the designated amount of the hedging instruments. The net investment value of the foreign operation is validated each quarter. Ineffective gains and losses are booked directly to the income statement. As at the end of ﬁ scal 2010, the hedge was 100% effective. 2010 2009 Foreign Exchange result deferred in other comprehensive income 2 – 2 Foreign Exchange result deferred in other comprehensive income – – – Hedged notional – – – Hedged notional 227 30 257 310 US$ million – favourable Bond 2012 Bond 2032 Net investment value of Sappi Fine Paper North America c) Liquidity risk Liquidity risk is the risk that the group will be unable to meet its current and future ﬁ nancial obligations as they fall due. The group’s objective is to manage its liquidity risk by: ■ managing its bank balances, cash concentration methods and cash ﬂ ows; ■ managing its working capital and capital expenditure; ■ ensuring the availability of a minimum amount of short-term borrowing facilities at all times, to meet any unexpected funding requirements; and ■ ensuring appropriate long-term funding is in place to support the group’s long term strategy. Details of the group’s borrowings, including the maturity proﬁ le thereof, as well as the group’s committed and uncommitted facilities are set out in note 20. The group is in compliance with all material ﬁ nancial covenants applicable to its borrowing facilities. 2010 annual report 167 Undiscounted cash ﬂ ows 0 – 6 months 6 – 12 months 1 – 2 years 2 – 5 years >5 years Total 13 – 18 (18) 1 1 18 (17) – – – – – 2 1 1 36 (35) 1 – – – – 3 6 17 372 (355) – – – – – 17 – – – – – – – – 38 19 444 (425) 777 17 267 (250) 792 23 17 1,643 29. Financial instruments (continued) Liquidity risk management 2010 Total ﬁ nancial assets and liabilities Fair value of ﬁ nancial instru- ments 38 19 38 19 US$ million Financial assets Other non-current assets Non-current derivative ﬁ nancial assets Receive leg Pay leg Trade and other receivables 777 777 776 Current derivative ﬁ nancial assets Receive leg Pay leg 15 15 Cash and cash equivalents 792 792 17 267 (250) 792 1,598 Financial liabilities Interest-bearing borrowings 2,317 2,612 71 71 1,084 1,571 507 3,304 Non-current derivative ﬁ nancial liabilities – – Pay leg Receive leg – 3 (3) Interest-bearing borrowings 691 732 571 Overdraft Current derivative ﬁ nancial liabilities Pay leg Receive leg 5 3 5 3 Trade and other payables 991 991 5 2 130 (128) 951 – 3 (3) 211 – 1 5 (4) 1 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 6 (6) 782 5 3 135 (132) 952 1,600 284 1,084 1,571 507 5,046 Liquidity gap (2) (282) (1,081) (1,548) (490) (3,403) 168 Notes to the group annual ﬁ nancial statements continued 29. Financial instruments (continued) Liquidity risk management 2009 Total ﬁ nancial assets and liabilities Fair value of ﬁ nancial instru- ments 43 10 43 10 US$ million Financial assets Other non-current assets Non-current derivative ﬁ nancial assets Receive leg Pay leg Trade and other receivables 734 734 Current derivative ﬁ nancial assets Receive leg Pay leg 10 10 Cash and cash equivalents 770 770 Financial liabilities Interest-bearing borrowings 2,726 3,021 Non-current derivative ﬁ nancial liabilities 24 24 Pay leg Receive leg Interest-bearing borrowings Overdraft Current derivative ﬁ nancial liabilities Pay leg Receive leg 601 19 14 602 19 14 Trade and other payables 860 860 Undiscounted cash ﬂ ows 0 – 6 months 6 – 12 months 1 – 2 years 2 – 5 years >5 years Total 44 10 130 (120) 734 11 262 (251) 770 15 – – – – – – – – 1 – – – – – – – – 1 8 – – – – – – – – 8 7 – – – – – – – – 7 15 1,569 100 494 2,716 123 3,530 1 19 (18) 106 – – – – – 2 38 (36) – – – – – – 17 425 (408) – – – – – – 1 1 – – – – – – – 22 502 (480) 655 19 14 620 (606) 818 13 10 130 (120) 734 11 262 (251) 770 1,538 97 1 19 (18) 549 19 14 620 (606) 818 Liquidity gap 40 (206) (488) (2,726) (109) (3,489) 1,498 207 496 2,733 124 5,058 2010 annual report 169 29. Financial instruments (continued) Derivative ﬁ nancial instruments with maturity proﬁ le The following tables indicate the different types of derivative ﬁ nancial instruments for 2010 and 2009, included within the various categories on the face of the balance sheet. Classes of derivative ﬁ nancial instruments September 2010 ASSETS Fair value of derivatives by risk factor Interest rate risk Interest rate swaps receiving leg paying leg Foreign exchange risk FX forward contracts receiving leg paying leg LIABILITIES Fair value of derivatives by risk factor Interest rate risk Interest rate swaps paying leg receiving leg Foreign exchange risk FX forward contracts paying leg receiving leg Fair value hedge Cash ﬂ ow hedge Total Maturity analysis* Undiscounted cash ﬂ ows <6M >6M <1Y >1Y <2Y >2Y <5Y >5Y 19 422 (403) 15 265 (250) – 6 (6) 3 135 (132) – – – – – – – – – – – – 19 422 (403) – – – – – – – – – – 18 (18) 17 267 (250) – 3 (3) 2 130 (128) 1 18 (17) – – – – 3 (3) 1 5 (4) 1 36 (35) 17 372 (355) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – * The reported maturity analysis is calculated on an undiscounted basis. 170 Notes to the group annual ﬁ nancial statements continued 29. Financial instruments (continued) Classes of derivative ﬁ nancial instruments Total Fair value hedge Cash ﬂ ow hedge Maturity analysis* Undiscounted cash ﬂ ows <6M >6M <1Y >1Y <2Y >2Y <5Y >5Y September 2009 ASSETS Fair value of derivatives by risk factor Interest rate risk Interest rate swaps receiving leg paying leg Foreign exchange risk FX forward contracts receiving leg paying leg LIABILITIES Fair value of derivatives by risk factor Interest rate risk Interest rate swaps paying leg receiving leg Foreign exchange risk FX forward contracts paying leg receiving leg 10 130 (120) 10 260 (250) 24 453 (429) 14 619 (605) 10 130 (120) – – – – – – – – – – – – – – – 24 453 (429) – – – 10 130 (120) 11 262 (251) 1 19 (18) 14 620 (606) – – – – – – 1 19 (18) – – – – – – – – – 2 38 (36) – – – – – – – – – 17 425 (408) – – – – – – – – – 1 1 – – – – * The reported maturity analysis is calculated on an undiscounted basis. 2010 annual report 171 29. Financial instruments (continued) Fair values All ﬁ nancial instruments are carried at fair value or amounts that approximate fair value except for the non-current interest-bearing borrowings at ﬁ xed rates of interest. The carrying amounts for cash, cash equivalents, accounts receivable, certain investments, accounts payable and current portion of interest-bearing borrowings approximate fair value due to the short-term nature of these instruments. Where these ﬁ xed rates of interest have been hedged into variable rates of interest and fair value hedge accounting has been applied, then the non-current interest-bearing borrowings are carried at fair value calculated by discounting all future cash ﬂ ows at market data valid at closing date. The same data is used to value the related hedging instrument. The best evidence of the fair value of a ﬁ nancial asset or ﬁ nancial liability at initial recognition is the transaction price, unless the fair value of the instrument is evidenced by comparison with other current observable market transactions. Where market prices or rates are available, such market data is used to determine the fair value of ﬁ nancial assets and ﬁ nancial liabilities. If quoted market prices are unavailable, the fair value of ﬁ nancial assets and ﬁ nancial liabilities is calculated using pricing models or discounted cash ﬂ ow techniques. Where discounted cash ﬂ ow techniques are used, estimated future cash ﬂ ows are based on management’s best estimates and the discount rate used is a market-related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, market-related inputs are used to measure fair value at the balance sheet date. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, are measured at cost. Fair values of foreign exchange and interest rate derivatives are calculated by using recognised treasury tools which use discounted cash ﬂ ow techniques based on effective market data valid at closing date. The fair value of loan commitments are based on the commitment fees effectively paid. 172 29. Financial instruments (continued) Classes of ﬁ nancial instruments Total balance September 2010 NON-CURRENT ASSETS Categories according to IAS 39 Out of scope IAS 39* Held for trading Loans and receiv- ables Held to maturity Available- for-sale Total in scope Fair value Other non-current assets 105 67 – 15 – 23 38 38 Loans to associates (minority interests) AFS – Club debentures AFS – Investment funds Other assets Derivative ﬁ nancial instruments CURRENT ASSETS – – – 67 – – – – 4 – 2 9 – – – – – 2 19 2 4 2 21 11 4 2 21 11 19 – 19 – – – 19 19 Trade and other receivables 888 111 Trade receivables Other accounts receivable – current Derivative ﬁ nancial instruments 15 Cash (and cash equivalents) 792 Overnight deposits and current accounts (including petty cash) Time deposits (<3 months) Money market funds – 111 – – – – – * This refers to items that are outside the scope of IAS 39. – – – 773 740 33 15 – – 792 – – – 115 676 1 – – – – – – – – 4 – 4 – – – – – 777 777 740 740 37 37 15 15 792 792 115 676 1 115 676 1 2010 annual report 173 29. Financial instruments (continued) Categories according to IAS 39 Total balance Out of scope IAS 39* Held for trading Other ﬁ nancial liabilities Total in scope Fair value 2,317 691 5 3 1,271 – – – – – – – – – – – – – 280 278 – 2 – – – – – – – – – – – – 3 – – – – 2,317 2,317 2,612 103 1,796 39 379 103 1,796 39 379 107 2,052 34 419 691 691 732 96 62 13 148 372 5 – 991 249 1 741 96 62 13 148 372 5 3 991 249 1 741 96 62 13 182 379 5 3 991 249 1 741 Classes of ﬁ nancial instruments September 2010 NON-CURRENT LIABILITIES Interest-bearing borrowings Bank loans payable (>1 year) – including syndicated loans Bonds Financial leasing liabilities Secured loans CURRENT LIABILITIES Interest-bearing borrowings Bank loans payable (<1 year) – including syndicated loans Current portion of other non-current loans payable Financial leasing liabilities Secured loans (<1 year) Securitisation debt Overdraft Bank overdrafts (<3 months) Derivative ﬁ nancial instruments Trade and other payables Accruals Accounts payable to associates Other accounts payable – current * This refers to items that are outside the scope of IAS 39. 174 29. Financial instruments (continued) Classes of ﬁ nancial instruments Total balance September 2009 NON-CURRENT ASSETS Other non-current assets 101 Categories according to IAS 39 Out of scope IAS 39* Held for trading Loans and receiv- ables Held to maturity Available- for-sale Total in scope Fair value Loans to associates (minority interests) AFS – Club debentures AFS – Investment funds Other assets Derivative ﬁ nancial instruments CURRENT ASSETS 58 – – – 58 – – – – – 20 4 – – 16 10 – 10 – Trade and other receivables 858 Trade receivables Other accounts receivable – current Derivative ﬁ nancial instruments Cash (and cash equivalents) Overnight deposits and current accounts (including petty cash) Time deposits (<3 months) Money market funds 10 770 124 – 124 – – – – – * This refers to items that are outside the scope of IAS 39. – – – 10 – – – – 734 667 67 – 770 99 628 43 – – – – – – – – – – – – – – 23 43 43 – 2 19 2 4 2 19 18 4 2 19 18 – – – – – – – – – 10 10 734 667 734 667 67 67 10 770 99 628 43 10 770 99 628 43 2010 annual report 175 Categories according to IAS 39 Total balance Out of scope IAS 39* Held for trading Other ﬁ nancial liabilities Total in scope Fair value 2,726 24 601 19 14 1,116 – – – – – – – – – – – – – – 256 255 – 1 – – – – 2,726 2,726 3,021 720 1,952 54 720 1,952 804 2,161 54 24 56 24 24 – – – – – – – – – 14 – – – – 601 601 602 149 32 19 67 333 1 19 – 860 262 1 597 149 32 19 67 333 1 19 14 860 262 1 597 150 32 19 67 333 1 19 14 860 262 1 597 29. Financial instruments (continued) Classes of ﬁ nancial instruments September 2009 NON-CURRENT LIABILITIES Interest-bearing borrowings Bank loans payable (>1 year) – including syndicated loans Bonds Financial leasing liabilities Derivative ﬁ nancial instruments CURRENT LIABILITIES Interest-bearing borrowings Bank loans payable (<1 year) – including syndicated loans Current portion of other non-current loans payable Financial leasing liabilities Secured loans (<1 year) Securitisation debt Other current loans – external Overdraft Bank overdrafts (<3 months) Derivative ﬁ nancial instruments Trade and other payables Accruals Accounts payable to associates Other accounts payable – current * This refers to items that are outside the scope of IAS 39. 176 29. Financial instruments (continued) Hierarchy of fair value measurements for ﬁ nancial instruments measured at fair value on the balance sheet: US$ million NON-CURRENT ASSETS Other non-current assets AFS – Club debentures AFS – Investment funds Derivative ﬁ nancial instruments CURRENT ASSETS Derivative ﬁ nancial instruments NON-CURRENT LIABILITIES Derivative ﬁ nancial instruments CURRENT LIABILITIES Derivative ﬁ nancial instruments 2010 Fair value hierarchy Level 1 Level 2 Level 3 Total fair value Total fair value 2009 Fair value hierarchy Level 1 Level 2 Level 3 2 19 2 19 – – – – 2 19 2 19 – – 19 – 19 – 10 – 10 15 55 – 21 15 34 – – 10 41 – 21 10 20 – – – – – – – – – 24 – 24 – 3 3 – – 3 3 – – 14 38 – – 14 38 – – 2010 annual report 177 30. Related party transactions Transactions between Sappi Limited company and its subsidiaries, which are related parties of the company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the group and other related parties are disclosed below: Sale of goods Purchases of goods Amounts owed by related parties Amounts owed to related parties US$ million 2010 2009 2008 2010 2009 2008 2010 2009 2010 2009 Joint ventures: – Jiangxi Chenming Paper Company Limited – Sapin S.A. – VOF Warmtekracht – Umkomaas Lignin (Pty) Limited – Papierholz Austria GmbH – Energie Biberist AG 1.1 0.5 10.8 2.0 0.4 4.0 0.3 38.1 44.2 5.6 0.9 1.1 – – – – – – 0.6 22.1 7.1 0.3 90.5 38.6 1.5 21.3 25.0 2.6 30.9 32.8 – 0.1 – – – – – – 1.8 0.9 68.5 92.7 – – – – – – 0.9 0.6 – – 8.1 3.8 3.7 0.9 – – 6.1 – 18.0 41.4 49.6 159.2 116.3 159.0 1.9 0.9 13.4 10.7 A description concerning the joint venture, Timber IV, is discussed in note 13. Sales of goods and purchases to and from related parties were made on an arm’s length basis. The amounts outstanding at balance sheet date are unsecured and will be settled in cash. Guarantees given by the group are disclosed in note 26. No expense has been recognised in the period for bad or doubtful debts in respect of the amounts owed by related parties. Shareholders The company’s shares are widely held by shareholders across the world. The principal shareholders of the company are disclosed in this annual report on pages 58 and 59. Directors Details relating to executive and non-executive directors’ emoluments, interests and participation in the Scheme and Plan are disclosed in the Compensation report. Interest of directors in contracts None of the directors have a material interest in any transaction with the company or any of its subsidiaries, other than those on a normal employment basis. Meyer Feldberg, a non-executive director of the company, disclosed his role as senior advisor of Morgan Stanley & Co. Limited, a ﬁ nancial advisor to Sappi, and Morgan Stanley South Africa (Pty) Limited, a transaction sponsor to Sappi Limited. 178 30. Related party transactions (continued) Broad-based Black Economic Empowerment (BBBEE) Transaction Refer to notes 17 and 28 for details of our BBBEE transaction. Key management personnel Compensation for key management was as follows: Total excluding directors Total including directors US$ million 2010 2009 2008 2010 2009 2008 Short-term beneﬁ ts Post-employment beneﬁ ts Other long-term beneﬁ ts Share-based payments 2.8 0.5 – – 3.3 2.9 0.7 – – 3.6 2.9 0.4 – – 3.3 3.9 0.8 – – 4.7 4.3 0.9 – – 5.2 4.3 0.7 – – 5.0 The number of key management personnel included above for 2010 was nine (2009: nine; 2008: ten). 31. Events after balance sheet date No signiﬁ cant changes have occurred in our ﬁ nancial position since September 26, 2010. 32. Environmental matters We are subject to a wide range of environmental laws and regulations in the various jurisdictions in which we operate, and these laws and regulations have tended to become more stringent over time. Violations of environmental laws could lead to substantial costs and liabilities, including civil and criminal ﬁ nes and penalties. Environmental compliance is an increasingly important consideration in our businesses, and we expect to continue to incur signiﬁ cant capital expenditures and operational and maintenance costs for environmental compliance, including costs related to reductions in air emissions such as carbon dioxide (CO2) and other greenhouse gases (GHG), wastewater discharges and waste management. We closely monitor the potential for changes in pollution control laws and take actions with respect to our operations accordingly. North America Sappi Fine Paper North America is subject to stringent environmental laws in the United States. These laws include the Federal Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act and their respective state counterparts and implementing regulations. On 29 June 2009, the Commissioner of the Department of Inland Fisheries and Wildlife, State of Maine (the “Commissioner”), issued a decision requiring Sappi Fine Paper North America to install a ﬁ sh passage at the Cumberland Mills dam associated with the Westbrook Mill, the most downriver dam on the Presumpscot River. On 12 May 2010, the Commissioner accepted a conceptual design for the ﬁ sh passage jointly proposed by the state, several non-governmental organisations and Sappi Fine Paper North America, and ﬁ nal detailed design drawings were submitted to the Commissioner on 24 September 2010. A ﬁ nal order approving the design was issued to Sappi Fine Paper North America on 05 October 2010. Pursuant to the order, construction of the ﬁ sh passage must be completed by 01 May 2013. Costs associated with construction and relating engineering of this ﬁ sh passage are estimated to be approximately US$4 million to US$5 million. Fish passage at the next dam upstream, the Saccarappa dam, must be operational two years after the Cumberland Mills dam ﬁ shway is completed, or during the spring of 2015. Installation of the Cumberland Mills dam ﬁ shway may also trigger, over a period of approximately ten years, the obligation to install ﬁ shways for at least some of Sappi Fine Paper North America’s other four upstream dams as well, to allow natural ﬁ sh migration and thus promote the restoration of native species to the river. The total cost of all ﬁ shways associated with Sappi’s dams along the Presumpscot River is estimated to be in the range of approximately US$18 million to US$28 million, which includes costs expected to be incurred in the next several years for the ﬁ sh passage on the Cumberland Mills and Saccarappa dams as well as estimated costs for upstream ﬁ shways which may be incurred in the future. Because construction of additional ﬁ shways depends on several future contingencies, including the results of data gathering on ﬁ sh populations in the river, we do not know the precise timing for incurring related future costs, assuming such obligations are triggered. 2010 annual report 179 32. Environmental matters (continued) We closely monitor state, regional and Federal GHG initiatives and other regulatory developments in anticipation of any potential effects on our operations. Although the United States has not ratiﬁ ed the Kyoto Protocol, and has not yet adopted a Federal programme for regulating GHG emissions, Congress is considering comprehensive Federal legislation regarding climate change, and various regional initiatives regarding emissions associated with climate change are in effect or proposed. In addition, the U.S. Environmental Protection Agency has ﬁ nalised or proposed several rules relating to emissions reporting and emissions reductions, including a proposed rule known as the “Boiler MACT” which would establish new standards for emissions of hazardous air pollutants from commercial and industrial boilers. Signiﬁ cant capital expenditures could be required for emissions control equipment at our mills in order to comply with the Boiler MACT and/or other proposed rules regulating GHGs. The nature, scope and timing of any proposed legislation, including climate change legislation, is highly uncertain and, currently, we do not know what precise effect, if any, such legislation will have on our ﬁ nancial condition and operations. Europe Our European facilities are subject to extensive environmental regulation in the various countries in which we operate. For example: ■ The Integrated Pollution Prevention and Control directive (IPPC) regulates air emissions, water discharges and deﬁ nes permit requirements and best available techniques (BAT) for pollution control. The revised BAT reference documents (BREFs) are expected to be ﬁ nalised in 2011. ■ The national European laws regulate the waste disposal framework and place restrictions on land ﬁ lling materials in order to reduce contaminated leachate and methane emissions. Prevention, reuse and recycling (material or thermal) are the preferred waste management methods. In Austria, Germany, Switzerland and The Netherlands only inert ash or slag from thermal recycling and incineration processes may be placed in landﬁ lls. ■ The EU Chemicals Regulation REACH (1907/2006/EC) intended to harmonise existing European and national regulations to provide a better protection of human health and our environment is not directly applicable to pulp and paper. It does, however, apply to a number of raw materials that we source. We will also register some intermediate substances in our pulp production processes. We expect this registration to be ﬁ nalised by November 2010. ■ In The Netherlands we, together with other paper manufacturers, have signed an agreement with the national government to improve environmental management and further limit emissions. The countries within which we operate in Europe have all ratiﬁ ed the Kyoto Protocol and we have developed a GHG strategy to comply with applicable GHG restrictions and to manage emission reductions cost effectively. South Africa In southern Africa, the environmental regulatory legal framework is still evolving, as is the enforcement process. We work with government authorities in striving to ﬁ nd a balance between economic development and, social and environmental considerations. The Minister of Water and Environmental Affairs considered it necessary to strengthen enforcement of legislation by the Environmental Management Inspectors (EMIs) in her department. The EMIs prioritised various sectors of industry and inspected those sectors in the course of the past four years. In 2008, 2009 and 2010, the EMIs focused attention on the pulp and paper sector, signalling more stringent enforcement for Sappi mills. In August 2008, the EMIs conducted a comprehensive inspection at our Ngodwana Mill. No major ﬁ ndings were raised. The EMIs inspected our Enstra mill during October 2009 and carried out a subsequent follow up visit in August 2010. Following that visit there has been correspondence with the Department of Environmental Affairs regarding some aspects of Enstra’s compliance with standards for atmospheric emissions; that communication is ongoing. The EMIs inspected our Tugela mill in October 2010. No oral ﬁ ndings were raised during the visit; a written report is expected within the next two months. The primary South African environmental laws affecting our operations are: ■ The National Water Act. This law addresses the water shortages in South Africa and relates to both our manufacturing and our forestry operations. Abstraction of water, discharge of efﬂ uent and management of forests are all regulated under a licensing system in which ﬁ rst allocations go to, among other things, human consumption, before allocations are made to agriculture, industry and forestry. All water use is subject to a charge. 180 32. Environmental matters (continued) ■ The National Environmental Management Act. This law provides for the integration of environmental considerations into all stages of any development process. The Act includes a number of signiﬁ cant principles, such as private prosecution of companies in the interest of the protection of the environment and the establishment of aggressive waste reduction goals. ■ The National Environmental Management Act: Air Quality Act was promulgated in the beginning of 2005 and has now replaced the 1965 Atmospheric Pollution Prevention Act. The new Act will impose more stringent compliance standards on our operations over a period of ﬁ ve to ten years. ■ The National Environmental Management Act: Waste Act was enacted on 01 July 2009. The Waste Act regulates the use, re-use, recycling and disposal of waste and regulates waste management by way of a licensing system. ■ The Kyoto Protocol. South Africa has also ratiﬁ ed the Kyoto Protocol. We are investigating Clean Development Mechanism projects, as deﬁ ned in the Kyoto Protocol, at South African mills. The requirements under these statutes, predominantly with respect to air emissions from our mills, will result in additional capital and operating expenditures, some of which may be signiﬁ cant. Our mills are in the process to receive air registration certiﬁ cates from the authorities which will clarify the impact this will have on our business. Legislation is, however, making provision to phase in new standards; the impact on our mills is therefore expected to be distributed over the next ﬁ ve to ten years. We are in frequent contact with regulatory authorities during the phasing in of these requirements, in an attempt to manage the transition period. 33. Acquisition On 31 December 2008, Sappi acquired M-real’s coated graphic paper business for an enterprise value of EUR750 million (approximately US$1.1 billion). The ﬁ nal purchase consideration was reduced by assumed debt and other adjustments (including working capital) amounting to EUR102 million in total. The transaction included M-real’s coated graphic paper business, including brands and company knowledge, as well as four coated graphic mills. This transaction has been accounted for by the purchase method of accounting. The acquisition was ﬁ nanced through a combination of equity, assumed debt, the cash proceeds from a rights offering and a vendor loan note. During ﬁ scal 2009, the acquired business contributed sales of US$890 million, net operating proﬁ t of US$33 million and net proﬁ t of US$38 million to the group results for the period from acquisition to ﬁ scal year end. Included in the net proﬁ t of the acquired business for the ﬁ scal 2009 year, is the US$41 million discount received on the settlement of the vendor loan notes. Details of net assets acquired and goodwill are as follows: Purchase consideration: Cash consideration Shares issued* Vendor loan note Adjustments to working capital Gain on forward exchange contract covering purchase consideration Direct costs relating to the acquisition Total purchase consideration Fair value of net identiﬁ able assets acquired (see below) Goodwill EURO million US$ million 401 32 220 (4) (24) 23 648 648 – 565 45 307 (6) (32) 32 911 911 – * 11 159 702 Sappi shares were issued to M-real as partial payment of the acquisition price. The fair value of US$45 million (EUR32 million) was determined using Sappi’s published market price at the date of exchange. 2010 annual report 181 33. Acquisition (continued) The assets and liabilities arising from the acquisition are as follows: EURO million EURO million US$ million US$ million Acquiree’s carrying amount Acquiree’s carrying amount Fair value Fair value Property, plant and equipment Information technology related intangibles Brand names Inventories Trade receivables Prepayments and other debit balances Cash and cash equivalents Trade payables Pension liabilities Borrowings Provisions Other payables and accruals Net deferred tax (liabilities) assets 634 2 – 118 200 15 5 (85) (37) (46) (4) (60) (11) 531 2 18 115 192 18 5 (85) (37) (42) (4) (65) – 892 3 – 166 281 21 7 (120) (52) (65) (6) (84) (15) Net identiﬁ able assets acquired 731 648 1,028 Outﬂ ow of cash to acquire business, net of cash acquired: 747 3 25 162 270 25 7 (120) (52) (59) (6) (91) – 911 Cash consideration Direct costs relating to acquisition Cash and cash equivalents in subsidiary acquired Net cash outﬂ ow on acquisition EURO million US$ million 401 23 (5) 419 565 32 (7) 590 182 Condensed company financial statements 2010 annual report 183 Company auditor’s report for the year ended September 2010 Independent auditor’s report to the members of Sappi limited The condensed annual ﬁ nancial statements of Sappi Limited set out on pages 184 to 188 have been derived from the annual ﬁ nancial statements of the company for the year ended September 2010. We have audited the annual ﬁ nancial statements in accordance with International Standards on Auditing. In our report dated 03 December 2010, we expressed an unqualiﬁ ed opinion on the annual ﬁ nancial statements from which the condensed ﬁ nancial statements were derived. Opinion In our opinion, the accompanying condensed ﬁ nancial statements are consistent, in all material respects, with the annual ﬁ nancial statements from which they were derived. For a better understanding of the scope of our audit and the company’s ﬁ nancial position, the results of its operations and cash ﬂ ows for the period, the condensed ﬁ nancial statements should be read in conjunction with our audit report and the annual ﬁ nancial statements from which they were derived. Deloitte & Touche Per M J Comber Partner 03 December 2010 Deloitte & Touche – Registered Auditors Buildings 1 and 2, Deloitte Place The Woodlands, Woodlands Drive, Woodmead Sandton Johannesburg, South Africa National Executive: G G Gelink Chief Executive A E Swiegers Chief Operating Ofﬁ cer G M Pinnock Audit D L Kennedy Tax & Legal and Risk Advisory L Geeringh Consulting L Bam Corporate Finance C R Beukman Finance T J Brown Clients & Markets N T Mtoba Chairman of the Board M J Comber Deputy Chairman of the Board. A full list of partners and directors is available on request. 184 Condensed Sappi Limited company income statements for the year ended September 2010 ZAR million Operating loss Income from subsidiaries Net ﬁ nance income Loss before taxation Taxation – Current – Deferred Loss for the year Note 2010 2009 1 2 3 (34) 22 7 (5) (3) (2) – (38) – 21 (17) 25 19 (61) Condensed Sappi Limited company statements of comprehensive income for the year ended September 2010 ZAR million Loss for the year Other comprehensive income, net of tax Total comprehensive income (loss) for the year 2010 2009 – – – (61) – (61) 2010 annual report 185 Condensed Sappi Limited company balance sheets at September 2010 ZAR million Assets Non-current assets Property, plant and equipment Investments in subsidiaries Inter-company receivables Loan to Executive Share Purchase Trust Deferred tax asset Current assets Trade and other receivables Inter-company receivables Taxation receivable Total assets Equity and liabilities Shareholders’ equity Ordinary share capital Share premium Non-distributable reserves Retained earnings Non-current liabilities Inter-company payables Current liabilities Trade and other payables Inter-company payables Taxation payable Total equity and liabilities 2010 2009 20,697 20,424 1 18,177 2,453 2 18,142 2,199 64 2 46 2 36 8 81 – 42 8 34 – 20,743 20,466 20,578 20,334 561 12,183 432 7,402 66 99 51 48 – 537 12,062 333 7,402 31 101 44 42 15 20,743 20,466 (Annexure A) (Annexure A) (Annexure A) (Annexure A) (Annexure A) 186 Condensed Sappi Limited company statements of changes in equity for the year ended September 2010 ZAR million Number of ordinary shares Ordinary share capital Share premium Ordinary share capital and share premium Non- distri- butable reserves Distri- butable reserves Total equity Balance – September 2008 239.1 239 6,427 6,666 Share-based payment Total comprehensive loss for the year Dividends* Rights issue proceeds Costs directly attributable to the rights issue Issue to M-real – – – 286.8 – 11.2 – – – – – – – – – 287 5,528 5,815 – 11 (302) 409 (302) 420 247 86 – – – – – 7,837 14,750 – (61) (374) – – – 86 (61) (374) 5,815 (302) 420 Balance – September 2009 537.1 537 12,062 12,599 333 7,402 20,334 Share-based payment Total comprehensive income (loss) for the year – – – – – – – – Share issue – BBBEE transaction 24.3 24 122 146 99 – – – – – 99 – 146 Balance – September 2010 561.4 561 12,184 12,745 432 7,402 20,579 * Dividends relate to the previous ﬁ nancial year’s earnings but were declared subsequent to year end. Condensed Sappi Limited company cash ﬂ ow statements for the year ended September 2010 ZAR million Loss before interest and taxation Adjustments: Dividends received pre-acquisition Subsidiary transactions Other Cash generated from (utilised in) operations Movement in working capital Net ﬁ nance income Taxation paid Dividends paid Cash utilised in operating activities Decrease in non-current assets Increase in investments Increase in equity and reserves Proceeds from share option deliveries Net movement in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2010 2009 (34) – (28) 25 (37) 13 7 (20) – (37) 16 – 21 – – – – (38) 82 306 13 363 (82) 21 (23) (374) (95) – (5,493) 5,513 75 – – – 2010 annual report 187 Notes to the condensed Sappi Limited company ﬁ nancial statements for the year ended September 2010 ZAR million 1. Operating loss The operating loss is arrived at after taking into account the items detailed below: Depreciation Technical and administrative services paid other than to bona ﬁ de employees of the company Auditors’ remuneration – fees for audit and related services – fees for other services – fees for Acquisition and related services Directors remuneration Staff costs Management fees received from subsidiaries Impairment of investment Income from subsidiaries Dividends received from subsidiaries Loss: Pre-acquisition portion Net ﬁ nance income Interest paid Interest received Net foreign exchange gains (losses) Commitments Operating leases and rentals Payable within one year Payable within two to ﬁ ve years Contingent liabilities Guarantees and suretyships 2. 3. 4. 5. 6. 2010 2009 1 5 13 9 4 – 21 119 227 – 22 – 22 – 4 3 7 1 – 1 2 10 12 8 4 – 19 96 211 – 82 (82) – – 35 (14) 21 1 1 2 13,747 20,581 Basis of preparation The annual ﬁ nancial statements from which these condensed ﬁ nancial statements have been derived have been prepared in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. 188 Investments at September 2010 Set out below are the more signiﬁ cant subsidiaries and joint ventures or those that have a loan with Sappi Limited: Annexure A Investments in subsidiaries and joint venture Southern Africa Sappi Southern Africa (Pty) Ltd(1) Sappi Share Facilitation Company (Pty ) Ltd Usutu Pulp Company Ltd Lereko Property Company (Pty) Ltd America SD Warren Company Sappi Cloquet LLC Europe Sappi Alfeld GmbH Sappi Austria Produktions GmbH and CoKG Sappi Deutschland GmbH Sappi Ehingen GmbH Sappi Esus Beteiligungsverwaltungs GmbH Sappi Europe SA Sappi Finland Oy Sappi Fine Paper plc Sappi Holding GmbH Sappi International SA Sappi Lanaken NV Sappi Lanaken Press Paper NV Sappi Maastricht BV Sappi Nijmegen BV Sappi Schweiz AG Sappi Stockstadt GmbH Sappi Papier Holding GmbH Sappi Trading Pulp AG PE Paper Escrow GmbH Sappi UK Ltd Asia Jiangxi Chenming Paper Co Ltd Other Brocas Ltd Lignin Insurance Co Ltd(3) Employee share participation Trusts Various other companies O O O P O O O O O O H O O D H F O O O O O O O O F O Share capital Effective holding Book value of investment Loan to subsidiary Loan from subsidiary 2010 % 2009 % 2010 ZAR million 2009 ZAR million 2010 ZAR million 2009 ZAR million 2010 ZAR million 2009 ZAR million ZAR12,026,250 100 100 1,885 1,851 1,644 1,410 ZAR1,000 SZL10,000,000 100 100 100 100 ZAR7,000 100 100 USD1,000 – (2) 100 100 100 100 EUR31,200,000 100 100 – – – – – – – – – – – – – – – – – – EUR35,000 EUR25,565 EUR20,800,000 EUR1,000,000 EUR15,130,751 EUR2,500 GBP50,000 EUR72,700 EUR1,200,603,930 EUR51,377,000 EUR57,179,613 EUR31,992 EUR59,037 CHF10,000 EUR40,000 EUR72,700 CHF100,000 EUR35,000 GBP74,020,000 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – – – 1 – 100 – 100 – – 100 1 100 16,288 16,288 – 100 – 100 – 100 – 100 – 100 – – – – – 100 – 100 – – – 100 – – – – – – – – – – – JV RMB1,424,160,000 34 34 H F US$3,385,401 US$656,000 100 100 100 100 – – 3 – – – – 2 – – 789 – 789 – – – – – – – – – – – – – 35 – – – – – – – – – – – – – 20 1 – – – – – – – – – – – – 34 – – – – – – – – – – – – – – – – – – – – – – – (14) – (7) – – – – – – (15) – – – – – – – – – – (8) (7) – – – – – – – (22) – – – – – – – – – – (1) (9) – – – – – – (66) (4) – – (31) (3) Write down of investment in subsidiaries Holding companies Operating companies Finance companies H O F 18,177 18,142 2,489 2,233 (114) (73) – – – – – – 18,177 18,142 2,489 2,233 (144) (73) Management companies Joint venture M JV Dormant Property Holding D P (1) Sappi Manufacturing (Pty) Limited’s name changed to Sappi Southern Africa (Pty) Limited on 12 October 2010. (2) No issued share capital, only additional paid in capital of US$488 million. (3) Declared a dividend out of pre-acquisition reserves. 2010 annual report 189 Glossary General deﬁ nitions bleached pulp – pulp that has been bleached by means of chemical additives to make it suitable for ﬁ ne paper production chemical cellulose – highly puriﬁ ed chemical pulp intended primarily for conversion into chemical derivatives of cellulose and management systems, while the ISO 14001 series is focused on environmental performance and management JSE Limited – the main securities exchange in South Africa, previously known as the Johannesburg Stock Exchange kraft paper – packaging paper (bleached or unbleached) made used mainly in the manufacture of viscose staple ﬁ bre, solvent spin from kraft pulp ﬁ bre and ﬁ lament kraft pulp – chemical wood pulp produced by digesting wood by chemical pulp – a generic term for pulp made from wood ﬁ bre means of the sulphate pulping process that has been produced in a chemical process coated papers – papers that contain a layer of coating material on one or both sides. The coating materials, consisting of pigments and binders, act as a ﬁ ller to improve the printing surface of the paper coated mechanical – coated paper made from groundwood pulp which has been produced in a mechanical process, primarily used for magazines, catalogues and advertising material coated woodfree – coated paper made from chemical pulp which is made from wood ﬁ bre that has been produced in a chemical process, primarily used for high end publications and advertising material corrugating medium – paperboard made from chemical and semi-chemical pulp, or waste paper, that is to be converted to a corrugated board by passing it through corrugating cylinders. Corrugating medium between layers of linerboard form the board Kyoto Protocol – a document signed by over 160 countries at Kyoto, Japan in December 1997 which commits signatories to reducing their emission of greenhouse gases relative to levels emitted in 1990 Lost-Time Injury number of lost time injuries x 200 000 Frequency Rate (LTIFR) = man hours linerboard – the grade of paperboard used for the exterior facings of corrugated board. Linerboard is combined with corrugating medium by converters to produce corrugated board used in boxes market pulp – pulp produced for sale on the open market, as opposed to that produced for own consumption in an integrated mill mechanical pulp – pulp produced by means of the mechanical grinding or reﬁ ning of wood or wood chips from which corrugated boxes are produced NBSK – Northern Bleached Softwood Kraft pulp. One of the COSO – the Committee of Sponsoring Organisations of the Treadway Commission main varieties of market pulp, produced from coniferous trees (ie spruce, pine) in Scandinavia, Canada and northern USA. The price of NBSK is a benchmark widely used in the pulp and paper ﬁ bre – ﬁ bre is generally referred to as pulp in the paper industry. industry for comparative purposes Wood is treated chemically or mechanically to separate the ﬁ bres during the pulping process fine paper – paper usually produced from chemical pulp for printing and writing purposes and consisting of coated and uncoated paper newsprint – paper produced for the printing of newspapers mainly from mechanical pulp and/or recycled waste paper OHSAS – is an international health and safety standard aimed at minimising occupational health and safety risks ﬁ rstly, by conducting a variety of analyses and secondly, by setting standards FSC – in terms of the Forest Stewardship Council (FSC) scheme, packaging paper – paper used for packaging purposes there are two types of certiﬁ cation. In order for land to achieve FSC endorsement, its forest management practices must meet the FSC’s ten principles and other assorted criteria. For manufacturers of forest products, including paper manufacturers like Sappi, Chain-of- Custody certiﬁ cation involves independent veriﬁ cation of the supply chain, which identiﬁ es and tracks the timber through all stages of the production process from the tree farm to the end product PEFC – the world’s largest forest certiﬁ cation system, the PEFC is focused on promoting sustainable forest management. Using multi-stakeholder processes, the organisation develops forest management certiﬁ cation standards and schemes which have been signed by 37 nations in Europe and other intergovernmental processes for sustainable forestry management around the world pulpwood – wood suitable for producing pulp – usually not of Greenhouse gases (GHGs) – the GHGs included in the Kyoto sufﬁ cient standard for saw-milling Protocol are carbon dioxide, methane, nitrous oxide, hydroﬂ uoro- carbons, perﬂ uorocarbons and sulphur hexaﬂ uoride ISO – developed by the International Standardisation Organisation (ISO), ISO 9000 is a series of standards focused on quality release paper – embossed paper used to impart design in polyurethane or polyvinyl chloride plastic ﬁ lms for the production of synthetic leather and other textured surfaces. The term also applies to backing paper for self adhesive labels 190 Glossary continued sackkraft – kraft paper used to produce multiwall paper sacks fair value – the value for which an asset could be exchanged or a silviculture costs – growing and tending costs of trees in forestry liability settled in a market related transaction operations speciality paper – a generic term for a group of papers intended ﬁ nancial results – comprise the ﬁ nancial position (assets, liabilities and equity), results of operations (revenue and expenses) and cash for commercial and industrial use such as ﬂ exible packaging, ﬂ ows of an entity and of the group metallised base paper, coated bag paper, etc functional currency – the currency of the primary economic thermo-mechanical pulp – pulp produced by processing wood environment in which the entity operates ﬁ bres using heat and mechanical grinding or reﬁ ning wood or wood chips foreign operation – an entity whose activities are based or conducted in a country or currency other than that of the reporting tons – term used in this report to denote a metric ton of 1,000 kg entity uncoated woodfree paper – printing and writing paper made from bleached chemical pulp used for general printing, photo- copying and stationery, etc. Referred to as uncoated as it does not contain a layer of pigment to give it a coated surface woodfree paper – paper made from chemical pulp General ﬁ nancial deﬁ nitions group – the group comprises Sappi Limited, its subsidiaries and its interest in joint ventures and associates joint venture – an economic activity over which the group exercises joint control established under a contractual arrangement operation – a component of the group: ■ that represents a separate major line of business or geographical acquisition – the acquisition of M-real’s coated graphic paper business on 31 December 2008 area of operation; and acquisition date – the date on which control in respect of ■ is distinguished separately for ﬁ nancial and operating purposes subsidiaries, joint control in joint ventures and signiﬁ cant inﬂ uence presentation currency – the currency in which ﬁ nancial results of in associates commences an entity are presented associate – an entity, other than a subsidiary or joint venture, qualifying asset – an asset that necessarily takes a substantial over which the group has signiﬁ cant inﬂ uence over ﬁ nancial and period (normally in excess of six months) to get ready for its operating policies intended use basic earnings per share – net proﬁ t for the year divided by the weighted average number of shares in issue during the year recoverable amount – the amount that reﬂ ects the greater of the net selling price and the value in use that can be attributed to an commissioning date – the date that an item of property, plant and asset as a result of its ongoing use by the entity. In determining the equipment, whether acquired or constructed, is brought into use value in use, expected future cash ﬂ ows are discounted to their control – the ability, directly or indirectly, to govern the ﬁ nancial and operating policies of an entity so as to obtain economic beneﬁ t from its activities. When assessing the ability to control an entity, the existence and effect of potential voting rights that are presently exercisable or convertible are taken into account present values using the discount rate related party – parties are considered to be related if one party directly or indirectly has the ability to control the other party or exercise signiﬁ cant inﬂ uence over the other party in making ﬁ nancial and operating decisions or is a member of the key management diluted earnings per share – is calculated by assuming conversion of Sappi Limited or exercise of all potentially dilutive shares, share options and share awards unless these are anti-dilutive discount rate – this is the pre-tax interest rate that reﬂ ects the current market assessment of the time value of money for the purposes of determining discounted cash ﬂ ows. In determining the cash ﬂ ows the risks speciﬁ c to the asset or liability are taken into segment assets – total assets (excluding deferred taxation and cash) less current liabilities (excluding interest-bearing borrowings and overdraft) share-based payment – a transaction in which Sappi Limited issues shares or share options to group employees as compensation account in determining those cash ﬂ ows and are not included in for services rendered determining the discount rate signiﬁ cant inﬂ uence – the ability, directly or indirectly, to participate disposal date – the date on which control in respect of subsidiaries, in, but not exercise control over, the ﬁ nancial and operating policy joint control in joint ventures and signiﬁ cant inﬂ uence in associates decisions of an entity so as to obtain economic beneﬁ t from its ceases activities 2010 annual report 191 Non-GAAP ﬁ nancial deﬁ nitions net assets – total assets less total liabilities The group believes that it is useful to report certain non-GAAP measures for the following reasons: ■ these measures are used by the group for internal performance analysis; ■ the presentation by the group’s reported business segments of these measures facilitates comparability with other companies in our industry, although the group’s measures may not be comparable with similarly titled proﬁ t measurements reported by other companies; and net asset value per share – net assets divided by the number of shares in issue at balance sheet date net debt – current and non-current interest-bearing borrowings, and bank overdraft (net of cash, cash equivalents and short-term deposits) net debt to total capitalisation – net debt divided by capital employed net operating assets – total assets (excluding deferred taxation ■ it is useful in connection with discussion with the investment and cash and cash equivalents) less current liabilities (excluding analyst community and debt rating agencies interest-bearing borrowings and overdraft) These non-GAAP measures should not be considered in isolation or construed as a substitute for GAAP measures in accordance with IFRS asset turnover (times) – sales divided by total assets average – averages are calculated as the sum of the opening and closing balances for the relevant period divided by two BBBEE charge – Represents the IFRS 2 non-cash charge associated with the Broad-based Black Economic Empowerment (BBBEE) transaction implemented as envisaged in the BEE legislation in South Africa capital employed – shareholders’ equity plus net debt cash interest cover – cash generated by operations divided by ﬁ nance costs less ﬁ nance revenue current asset ratio – current assets divided by current liabilities dividend yield – dividends per share, which were declared after year end, in US cents divided by the ﬁ nancial year end closing prices on the JSE Limited converted to US cents using the closing ﬁ nancial year end exchange rate earnings yield – headline earnings per share divided by the ﬁ nancial year end closing prices on the JSE Limited converted to US cents using the closing ﬁ nancial year end exchange rate EBITDA excluding special items – earnings before interest (net ﬁ nance costs), taxation, depreciation, amortisation and special items fellings – the amount charged against the income statement representing the standing value of the plantations harvested headline earnings – as deﬁ ned in circular 3/2009 issued by the South African Institute of Chartered Accountants, separates from earnings all separately identiﬁ able re-measurements. It is not necessarily a measure of sustainable earnings. It is a Listings Requirement of the JSE Limited to disclose headline earnings per share inventory turnover (times) – cost of sales divided by inventory on hand at balance sheet date ordinary dividend cover – proﬁ t for the period divided by the ordinary dividend declared multiplied by the actual number of shares in issue at period end ordinary shareholders’ interest per share – shareholders’ equity divided by the actual number of shares in issue at year end price/earnings ratio – the ﬁ nancial year end closing prices on the JSE Limited converted to US cents using the closing ﬁ nancial year end exchange rate divided by headline earnings per share ROCE – return on average capital employed. Operating proﬁ t excluding special items divided by average capital employed ROE – return on average equity. Proﬁ t for the period divided by average shareholders’ equity RONOA – return on average net operating assets. Operating proﬁ t excluding special items divided by average net operating assets SG&A – selling, general and administrative expenses special items – special items cover those items which management believe are material by nature or amount to the operating results and require separate disclosure. Such items would generally include proﬁ t or loss on disposal of property, investments and businesses, asset impairments, restructuring charges, non- recurring integration costs related to acquisitions, ﬁ nancial impacts of natural disasters, non-cash gains or losses on the price fair value adjustment of plantations and alternative fuel tax credits receivable in cash total market capitalisation – ordinary number of shares in issue (excluding treasury shares held by the group) multiplied by the ﬁ nancial year end closing prices on the JSE Limited converted to US cents using the closing ﬁ nancial year end exchange rate trade receivables days outstanding (including securitised balances) – gross trade receivables, including receivables securitised, divided by sales multiplied by the number of days in the year 192 Notice to shareholders Notice of annual general meeting THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR Ordinary resolution number 2.4 “Resolved that Mrs Bridgette Radebe is re-elected as a IMMEDIATE ATTENTION director of Sappi Limited.” If you are in any doubt as to what action you should take, please 4. Ordinary resolution number 3: Re-appointment of auditors consult your stockbroker, banker, attorney, accountant or other professional advisor immediately. Sappi Limited (Registration No 1936/008963/06) (“Sappi”) The seventy-fourth annual general meeting of Sappi will be held in the Auditorium, Ground Floor, 48 Ameshoff Street, Braamfontein, The board has evaluated the performance of Deloitte & Touche and recommends and supports their re-appointment as auditors of Sappi. “Resolved to re-appoint Deloitte & Touche (with the designated registered auditor being Mr R Campbell) as the auditors of Sappi Limited for the year ending September 2011”. Johannesburg on Wednesday, 09 February 2011, at 14:30. The 5. Ordinary resolutions number 4.1 to 4.3: The Sappi Limited following business will be transacted and resolutions proposed Performance Share Plan and the Sappi Limited Share Incentive with or without modiﬁ cation. Scheme. 1. Annual ﬁ nancial statements: Receive and consider the annual Ordinary resolution number 4.1 ﬁ nancial statements for the year ended September 2010. “Resolved as an ordinary resolution that all the ordinary shares 2. Ordinary resolution number 1: Conﬁ rmation of appointment of directors appointed subsequent to the last annual general meeting and subsequent to the ﬁ nancial year end, and re- election of those directors. “Resolved that the appointment of Mr Mohammed Valli Moosa with effect from 01 August 2010 is conﬁ rmed and as, in terms of the articles of association of Sappi Limited, he retires from ofﬁ ce at the conclusion of the annual general meeting at which this resolution is required for the purpose of carrying out the terms of The Sappi Limited Performance Share Incentive Plan (the Plan), other than those which have speciﬁ cally been appropriated for the Plan in terms of ordinary resolutions duly passed at previous general meetings of Sappi Limited, be and are hereby speciﬁ cally placed under the control of the directors who be and are hereby authorised to allot and issue those shares in terms of the Plan.” considered, he is re-elected as a director of Sappi Limited.” Ordinary resolution number 4.2 For Mr Moosa’s personal details, refer to note 1 under Notes on page 195. 3. Ordinary resolutions numbers 2.1 to 2.4: Re-election of the directors retiring by rotation in terms of Sappi’s articles of association. The board has evaluated the performances of each of the directors who are retiring by rotation, and recommends and supports the re-election of each of them. For personal details on those directors, refer to note 2 under Notes on pages 195 to 196. It is intended that all the directors who retire by rotation will, if possible, attend the annual general meeting, either in person or by means of videoconferencing. Ordinary resolution number 2.1 “Resolved that Dr Daniël Christiaan Cronjé is re-elected as a director of Sappi Limited.” Ordinary resolution number 2.2 “Resolved that Professor Meyer Feldberg is re-elected as a director of Sappi Limited.” Ordinary resolution number 2.3 “Resolved as an ordinary resolution that all the ordinary shares required for the purpose of carrying out the terms of The Sappi Limited Share Incentive Scheme (the Scheme), other than those which have speciﬁ cally been appropriated for the Scheme in terms of ordinary resolutions duly passed at previous general meetings of Sappi Limited, be and are hereby speciﬁ cally placed under the control of the directors who be and are hereby authorised to allot and issue those shares in terms of the Scheme.” Ordinary resolution number 4.3 “Resolved as an ordinary resolution that any subsidiary of Sappi Limited (Subsidiary) be and is hereby authorised in terms of the Listings Requirements of the JSE Limited to sell at the price at which a participant is allowed to acquire the Company’s shares and to transfer to The Sappi Limited Share Incentive Scheme and/or The Sappi Limited Performance Share Incentive Plan (collectively “the Schemes”) those number of Sappi Limited’s shares acquired by that Subsidiary from time to time but not exceeding the maximum number of Sappi Limited’s shares available to the Schemes as may be required “Resolved that Mrs Karen Rohn Osar is re-elected as a by the Schemes when a participant to whom Sappi Limited’s director of Sappi Limited.” shares will be allocated has been identiﬁ ed.” 2010 annual report 193 The passing of resolutions 4.1 and 4.2 will enable the directors to continue to meet the share requirements of the Sappi Limited Share Incentive Scheme and the Sappi Limited Performance Share Incentive Plan (collectively the Schemes), both of which Schemes are already in place and subject to the 2. Audit committees Group committee Listings Requirements of the JSE Limited. The passing of Chairperson from to resolution 4.3 will provide directors with the ﬂ exibility to utilise shares repurchased from time to time by a wholly-owned subsidiary of Sappi Limited and held in treasury by the subsidiary company, for the purposes of satisfying the share requirements of the Schemes, at times when the directors consider that to be more efﬁ cient than issuing new shares in If South African resident ZAR254,100 ZAR284,500 If European resident GBP36,400 GBP38,200 If USA resident US$55,100 US$58,500 Other members the capital of Sappi. If South African resident ZAR126,300 ZAR142,250 At present there is a combined maximum number of 42,700,870 shares for allocation to the Schemes (7.95% of the ordinary issued share capital) of which 12,325,960 shares have already If European resident GBP18,300 GBP19,200 If USA resident US$27,500 US$28,500 been issued to, or transferred to the Schemes, leaving a Regional audit committees balance of up to 30,374,910 shares which could still need to be issued or transferred to the Schemes. Chairperson 6. Ordinary resolution number 5: Remuneration policy If South African resident “Resolved as an ordinary resolution, (non-binding) that the company’s remuneration policy as contained in the Compensation report on pages 69 to 77 of the annual report, be approved.” If European resident If USA resident ZAR32,100 per meeting GBP4,700 per meeting US$6,900 per meeting ZAR35,900 per meeting GBP4,900 per meeting US$7,160 per meeting This non-binding resolution is being proposed in accordance 3. Human resources and transformation committee, with the recommendations of King III. 7. Ordinary resolution number 6: Non-executive directors’ fees “Resolved that, with effect from 01 October 2010 and until otherwise determined by Sappi Limited (Sappi) in general meeting, the remuneration per annum, unless stated otherwise, of the non-executive directors for their services shall be compensation committee, nomination and governance committee, sustainability committee and any additional committees Chairperson If South African resident ZAR158,400 ZAR171,000 If European resident GBP21,900 GBP22,700 increased as follows: If USA resident US$32,600 US$33,400 from to Other members 1. Sappi board fees If South African resident ZAR82,400 ZAR89,000 Chairperson ZAR1,765,500* ZAR2,000,000* If European resident GBP15,400 GBP15,900 * Inclusive of all committee fees. Lead independent director If South African resident ZAR380,900 ZAR410,000 If European resident GBP54,600 GBP56,500 If USA resident US$82,700 US$84,750 Other directors If USA resident US$19,900 US$20,400 4. Additional meeting fees for board meetings in excess of ﬁ ve meetings per annum (whether attended in person or by teleconference/videoconference) If South African resident If European resident ZAR25,400 per meeting GBP3,600 per meeting US$5,500 per meeting ZAR27,450 per meeting GBP3,720 per meeting US$5,640 per meeting If South African resident ZAR254,100 ZAR274,400 If European resident GBP36,400 GBP37,650 If USA resident If USA resident US$55,100 US$56,450 5. Travel compensation (increase of 3.6%) For more than 10 ﬂ ight hours return US$2,800 per meeting US$2,900 per meeting 194 Notice to shareholders continued Sappi indicated in the notice to shareholders dated Proxies 06 December 2004 that it planned to review directors’ fees A shareholder is entitled to appoint one or more proxies to annually in future. Ordinary resolution number 6 increases the attend, speak and on a poll to vote in his stead. A proxy need remuneration currently paid to non-executive directors and not be a shareholder. For the convenience of shareholders, a board committee members by between approximately 2.5% form of proxy is enclosed. and 13.3% per annum depending generally on the domicile of the directors and the currency in which they are paid, with effect from 01 October 2010. The fees were last increased with effect from 01 October 2009 and have been reviewed to ensure that Sappi’s fees remain generally comparable with those of its peer companies in the various countries in which its directors are domiciled. The responsibility of non-executive directors continues to increase substantially flowing from legislative, regulatory The attached form of proxy is only to be completed by a shareholder who holds Sappi shares in certiﬁ cated form or has dematerialised his shares (i.e. has replaced the paper share certiﬁ cates with electronic records of ownership under JSE’s electronic settlement system (Strate Limited) and is recorded in the sub-register in “own name” dematerialised form (ie a shareholder who has speciﬁ cally instructed his Central Securities Depositary Participant (CSDP) or broker to hold his shares in his own name on Sappi’s sub-register). and corporate governance requirements. More and more A shareholder who has dematerialised his shares and who is responsibility is being placed on company chairmen and not registered as an “own name” dematerialised shareholder company audit committees and in recognition of this, it is and who wishes to: considered appropriate to increase their fees by a higher percentage than the other fees. The proposed fees are considered reasonable in the circumstances. The practice has been and will continue to be that directors’ and board committee fees are paid to non-executive directors only. 8. Ordinary resolution number 7: Signature of documents “Resolved that any director of Sappi Limited is authorised to sign all such documents and do all such things as may be necessary for or incidental to the implementation of the – attend the annual general meeting must instruct his CSDP or broker to provide him with a letter of representation to enable him to attend such meeting; or – vote but not to attend the annual general meeting, must provide his CSDP or broker with his voting instructions in terms of the relevant custody agreement between him and his CSDP or broker. Such a shareholder must not complete the attached form of proxy. resolutions passed at the annual general meeting held on When authorised to do so, CSDPs or brokers recorded in 09 February 2011 or any adjournment thereof.” Sappi’s sub-register or their nominees should vote either by appointing a duly authorised representative to attend and vote at the annual general meeting to be held on 09 February 2011 or any adjournment thereof, or by completing the attached form of proxy and returning it to one of the addresses indicated on the form of proxy in accordance with the instructions thereon. 2010 annual report 195 QUESTIONS Skills, expertise and experience The board encourages shareholders to attend and to ask questions Mr Moosa is currently the Deputy Chairman of Lereko at the annual general meeting. In order to facilitate the answering of Investments (Pty) Limited, Sappi’s Strategic Black Economic questions at the meeting, shareholders who wish to ask questions Empowerment partner. He has held numerous leadership in advance are encouraged to submit their questions in writing to the positions across business, government, politics and civil society Group Secretary by 17:00 on Monday, 07 February 2011 at: in South Africa. To name but a few, he was South African 7th Floor 48 Ameshoff Street Braamfontein Johannesburg, 2001 or PO Box 31560 Braamfontiein 2017 or by e-Mail to Denis.O’Connor@sappi.com Sappi Southern Africa (Pty) Limited Secretaries: per D J O’Connor 48 Ameshoff Street Braamfontein, Johannesburg 2001 15 December 2010 Notes 1. Conﬁ rmation of appointment of director appointed since the last annual general meeting and subsequent to the year end, and the re-election of that director: Mohammed Valli Moosa Age: 53 Qualiﬁ cations: BSc (Mathematics) Nationality: South African Appointed: August 2010 Non-executive Minister of Environmental Affairs and Tourism, the President of the IUCN (International Union for the Conservation of Nature); Chairman of the UN Commission for Sustainable Development, and he was a long serving National Executive Committee member of the African National Congress (ANC). 2. Directors retiring by rotation who are seeking re-election: Dr Daniël Christiaan Cronjé Chairman Age: 64 Qualiﬁ cations: BCom (Hons), MCom, DCom Nationality: South African Appointed: January 2008 Independent Sappi board committee memberships – Human resources and transformation committee (chairman) – Nomination and governance committee (chairman) (Attends audit committee meetings and compensation committee meetings ex ofﬁ cio) Other board and organisation memberships Die Dagbreek Trust (chairman) Eqstra Holdings Limited (chairman) Skills, expertise and experience Dr Cronjé retired in July 2007 as chairman of both ABSA Group Limited and ABSA Bank Limited (a leading South African Banking organisation in which Barclays plc obtained a majority share in 2005). Dr Cronjé had been with ABSA Group since 1975 and held various executive positions including group chief executive for four years and chairman for 10 Other board and organisation memberships years. Prior to that Dr Cronjé was lecturer in Money and Auditor General’s Advisory Committee (South Africa) Banking at Potchefstroom University. Anglo Platinum Limited (deputy chairperson and lead independent director) Imperial Holdings Limited Lereko Investment (Pty) Limited and various other associate companies of Lereko Investment (Pty) Limited Real Africa Holdings Limited (chairman) Sanlam Limited Sun International Limited (chairman) 196 Notice to shareholders continued Professor Meyer Feldberg Age: 68 Qualiﬁ cations: BA, MBA, PhD Nationality: American Appointed: March 2002 Lead independent director Karen Rohn Osar Age: 61 Qualiﬁ cations: MBA, Finance Nationality: American Appointed: May 2007 Independent Sappi board committee memberships – Compensation committee (chairman) – Nomination and governance committee Other board and organisation memberships include British American Business Council (advisory board member) Sappi board committee memberships – Audit committee Other board and organisation memberships Innophos Holdings, Inc. (also chairperson of audit committee) Reader’s Digest Association Webster Financial Corporation Columbia University Business School Macy’s, Inc Morgan Stanley (senior adviser) New York City Ballet New York City Global Partners (president) PRIMEDIA, Inc Revlon, Inc UBS Global Asset Management University of Cape Town Graduate School of Business Skills, expertise and experience Professor Feldberg is currently serving as a senior advisor to Morgan Stanley. His career has included teaching and leadership positions in the Business Schools of the University of Cape Town, Northwestern and Tulane. He served as president of Illinois Institute of Technology for three years and as dean of Columbia Business School for 15 years. He is currently dean emeritus and professor of leadership at Columbia Business School. He has served on the Council of Competitiveness in Washington, DC. In 2001, the International Centre in New York honoured Professor Feldberg as a distinguished foreign-born American who has made a signiﬁ cant contribution to American life. Skills, expertise and experience Ms Osar was executive vice president and chief ﬁ nancial ofﬁ cer of specialty chemicals company Chemtura Corporation until her retirement in March 2007. Prior to that, she held various senior management and board positions in her career. She was vice president and treasurer for Tenneco, Inc and also served as chief ﬁ nancial ofﬁ cer of Westvaco Corporation and as senior vice president and chief ﬁ nancial ofﬁ cer of the merged MeadWestvaco Corporation. Prior to those appointments she spent 19 years at JP Morgan and Company, becoming a managing director of the Investment Banking Group. She has chaired several board audit committees. Bridgette Radebe Age: 50 Qualiﬁ cations: BA (Pol Sc and Socio) Nationality: South African Appointed: May 2004 Independent Sappi board committee memberships – Human resources and transformation committee Other board and organisation memberships Mmakau Mining (Pty) Limited (executive chairperson) South African Mining Development Association (president) Mineral and Mining Development Board (former vice chairman) New Africa Mining Fund (founder and board trustee) Skills, expertise and experience Ms Radebe was the ﬁ rst black South African deep level hard rock mining entrepreneur in the 1980s. She has more than a decade of experience in contract mining, mining construction and mining mergers and acquisitions. She is founder of Mmakau Mining which has investments in platinum, coal, chrome and gold mines as well as shaft sinkers. She participated in the design of the South African Mining Charter and present mining legislation. Shareholders’ diary Annual general meeting First quarter results released Second quarter and half-year results released Third quarter results released Financial year end Preliminary fourth quarter and year results including dividend announcement released Annual report posted to shareholders 2010 annual report 197 09 February 2011 February 2011 May 2011 August 2011 September 2011 November 2011 December 2011 198 Administration Sappi Limited Registration number 1936/008963/06 United States ADR Depositary The Bank of New York Mellon Investor Relations PO Box 11258 Church Street Station New York, NY 10286-1258 Telephone (US only) 1 888 BNYADRS Telephone (outside the US) +1 201 680 6825 e-Mail shrrelations@bnymellon.com Website www.bnymellon.com/shareowner Corporate affairs André Oberholzer – Group Head Telephone +27 (0)11 407 8111 Fax +27 (0)11 403 8236 e-Mail Andre.Oberholzer@sappi.com Investor relations Graeme Wild – Group Investor Relations Manager Telephone +27(0)11 407 8391 Fax +27(0)11 403 1493 e-Mail Graeme.Wild@sappi.com JSE code: SAP ISIN code: ZAE 000006284 NYSE code: SPP Group secretary Denis O’Connor Secretaries Sappi Southern Africa (Pty) Limited 48 Ameshoff Street 2001 Braamfontein South Africa PO Box 31560 2017 Braamfontein South Africa Telephone +27 (0)11 407 8111 Fax +27 (0)11 339 1881 e-Mail Denis.O’Connor@sappi.com Website www.sappi.com Transfer secretaries South Africa Computershare Investor Services (Pty) Limited 70 Marshall Street 2001 Johannesburg PO Box 61051 2107 Marshalltown Telephone +27 (0)11 370 5000 Fax +27 (0)11 370 5217 e-Mail registrar@computershare.co.za 2010 annual report 199 Proxy form for annual general meeting Sappi Limited (Registration number 1936/008963/06) (Incorporated in the Republic of South Africa) (“Sappi” or “the company”) Issuer code: SAP JSE code: SAP ISIN code: ZAE000006284 For use by shareholders who: – hold shares in certiﬁ cated form; or – hold dematerialised shares (i.e. where the paper share certiﬁ cates representing the shares have been replaced with electronic records of ownership under the electronic settlement and depositary system (Strate Limited) of the JSE Limited) and are recorded in Sappi’s sub-register with “own name” registration) (i.e. shareholders who have speciﬁ cally instructed their Central Securities Depository Participant (“CSDP”) to record the holding of their shares in their own name in Sappi’s sub-register). If you are unable to attend the seventy-fourth annual general meeting of the members to be held at 14:30 on Wednesday, 09 February 2011 in the Auditorium, Ground Floor, 48 Ameshoff Street, Braamfontein, Johannesburg, 2001, Republic of South Africa, you should complete and return the form of proxy as soon as possible, but in any event to be received by not later than 14:30 South African time on Monday, 07 February 2011, to Sappi’s transfer secretaries, Computershare Investor Services (Pty) Limited, by way of hand delivery to 70 Marshall Street, Johannesburg, 2001, Republic of South Africa or by way of postal delivery to PO Box 61051, Marshalltown, 2107, Republic of South Africa. Shareholders who have dematerialised their shares and who do not have “own name” registration and wish to attend the annual general meeting, must instruct their CSDP or broker to provide them with the relevant letter of representation to enable them to attend such meeting, or, alternatively, should they wish to vote but not to attend the annual general meeting, they must provide their CSDP or broker with their voting instructions in terms of the relevant custody agreement entered into between them and the CSDP or broker. Such shareholders must not complete this form of proxy. I/We of being a shareholder(s) of Sappi holding Sappi shares and entitled to vote at the above mentioned annual general meeting, appoint or failing him/her or failing him/her or failing him/her, the chairman of the meeting as my/our proxy to attend and speak and, on a poll, to vote for me/us on the resolutions to be proposed (with or without modiﬁ cation) at the annual general meeting of Sappi to be held at 14:30 on Wednesday, 09 February 2011 or any adjournment thereof, as follows: Number of shares For Against Abstain Ordinary resolution number 1 – conﬁ rmation of appointment and re-election of directors appointed since the last annual general meeting* – Mr Mohammed Valli Moosa Ordinary resolution number 2 – Re-election of directors retiring by rotation in terms of Sappi’s Articles of Association*: Ordinary resolution number 2.1 – Re-election of Dr Daniël Christiaan Cronjé as a director of Sappi Ordinary resolution number 2.2 – Re-election of Professor Meyer Feldberg as a director of Sappi Ordinary resolution number 2.3 – Re-election of Mrs Karen Rohn Osar as a director of Sappi Ordinary resolution number 2.4 – Re-election of Mrs Bridgette Radebe as a director of Sappi Ordinary resolution number 3 ending September 2011 – Re-appointment of Deloitte & Touche as auditors of Sappi for the year Ordinary resolution number 4.1 – The placing of all ordinary shares required for the purpose of carrying out the terms of the Sappi Limited Performance Share Incentive Plan (“the Plan”) under the control of the directors to allot and issue in terms of the Plan Ordinary resolution number 4.2 – The placing of all ordinary shares required for the purpose of carrying out the terms of the Sappi Limited Share Incentive Scheme (“the Scheme”) under the control of the directors to allot and issue in terms of the Scheme Ordinary resolution number 4.3 – The authority for any subsidiary of Sappi to sell and to transfer to the Sappi Limited Share Incentive Scheme and the Sappi Limited Performance Share Incentive Plan (collectively “the Schemes”) such shares as may be required for the purposes of the Schemes Ordinary resolution number 5 – Non-binding approval of remuneration policy Ordinary resolution number 6 – Increase in non-executive directors’ fees Ordinary resolution number 7 – Authority for directors to sign all documents and do all such things necessary to implement the above resolutions Insert X in the appropriate block if you wish to vote all your shares in the same manner. If not, insert the number of votes in the appropriate block. If no indication is given, the proxy will vote as he/she thinks ﬁ t. Signed at on Assisted by me (where applicable) Each shareholder is entitled to appoint one or more proxies (who need not be shareholders of Sappi) to attend, speak, and on a poll, vote in place of that shareholder at the annual general meeting or any adjournment thereof. * Refer note to notice of meeting on page 192. 200 Notes to proxy The form of proxy must only be used by certiﬁ cated shareholders or shareholders who hold dematerialised shares with “own name” registration. Other shareholders are reminded that the onus is on them to communicate with their CSDP or broker. Instructions on signing and lodging the annual general meeting proxy form 1 A deletion of any printed matter (only where a shareholder is allowed to choose between more than one alternative option) and the completion of any blank spaces need not be signed or initialled. Any alteration must be signed, not initialled. 2 The chairman shall be entitled to decline to accept the authority of the signatory: 2.1 under a power of attorney; or 2.2 on behalf of a company, if the power of attorney or authority has not been lodged at the ofﬁ ces of the company’s transfer secretaries, Computershare Investor Services (Pty) Limited, 70 Marshall Street, Johannesburg, 2001, Republic of South Africa or posted to PO Box 61051, Marshalltown, 2107, Republic of South Africa. 3 The signatory may insert the name(s) of any person(s) whom the signatory wishes to appoint as his/her proxy in the blank spaces provided for that purpose. 4 When there are joint holders of shares and if more than one of such joint holders is present or represented, the person whose name stands ﬁ rst in the register in respect of such shares or his/her proxy, as the case may be, shall alone be entitled to vote in respect thereof. 5 The completion and lodging of the form of proxy will not preclude the signatory from attending the meeting and speaking and voting in person thereat to the exclusion of any proxy appointed in terms hereof should such signatory wish to do so. 6 Forms of proxy must be lodged with, or posted to, the ofﬁ ces of Sappi’s transfer secretaries, Computershare Investor Services (Pty) Limited, at 70 Marshall Street, Johannesburg, 2001, Republic of South Africa, (for hand delivery) or PO Box 61051, Marshalltown, 2107, Republic of South Africa (for postal delivery), to be received by not later than 14:30 on Monday, 07 February 2011. 7 If the signatory does not indicate in the appropriate place on the face hereof how he/she wishes to vote in respect of a particular resolution, his/her proxy shall be entitled to vote as he/she deems ﬁ t in respect of that resolution. 8 The chairman of the annual general meeting may reject any proxy form which is completed other than in accordance with these instructions and may accept any proxy form when he is satisﬁ ed as to the manner in which a member wishes to vote. Our reporting strategy Forward-looking statements The King Report on Governance for South Africa 2009 (King III), information that is material, relevant, accessible, understandable which is recognised internationally as a leading governance and comparable” and to demonstrate that “…strategy, risk, standard, was adopted by the JSE and became effective on performance and sustainability are inseparable” in the way Sappi 01 March 2010. As we are headquartered in South Africa with our manages its business. primary listing on the JSE Limited we subscribe to King III. In line with the integrated reporting requirement contained in King III, we have increased the level of integration in this year’s report. Primarily we are responding to the guideline to “…transparently disclose We use various structured reporting mechanisms to assist stakeholders to make informed decisions about their interactions with the group. For a complete view of Sappi’s strategy, performance in the year ended September 2010 and longer term prospects, stakeholders are directed to the following sources of company information:  Quarterly results announcements and analyst presentations.  Annual reports and accounts, prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).  Form 20-F, prepared in accordance with US Securities and Exchange Commission (SEC) regulations.  Sustainable development report, aimed at giving the reader a broad overview of our sustainability performance.  Our online report (http://sappi.investoreports.com/sappi_sdr_2010) follows the same structure as the printed report, but incorporates additional detail and includes a comprehensive Global Reporting Initiative (GRI) index which has links to relevant sections in the annual report, the Form 20-F and previous sustainability reports.  Group website – www.sappi.com Certain statements in this report that are neither reported ﬁ nancial results nor other historical information, are forward-looking statements, including but not limited to statements that are predictions of or indicate future earnings, savings, synergies, events, trends, plans or objectives. The words ‘believe’, ‘anticipate’, ‘expect’, ‘intend’, ‘estimate’, ‘plan’, ‘assume’, ‘positioned’, ‘will’, ‘may’, ‘should’, ‘risk’ and other similar expressions, which are predictions of or indicate future events and future trends, which do not relate to historical matters, identify forward- looking statements. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results and company plans and objectives to differ materially from those expressed or implied in the forward-looking statements (or from past results). Such risks, uncertainties and factors include, but are not limited to:  the highly cyclical nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand, production capacity, production, input costs including raw material, energy and employee costs, and pricing);  the impact on our business of the global economic downturn;  unanticipated production disruptions (including as a result of planned or unexpected power outages);  changes in environmental, tax and other laws and regulations;  adverse changes in the markets for the group’s products;  consequences of substantial leverage, including as a result of adverse changes in credit markets that affect our ability to raise capital when needed;  adverse changes in the political situation and economy in the countries in which we operate or the effect of governmental efforts to address present or future economic or social problems;  the impact of investments, acquisitions and dispositions (including related ﬁ nancing), any delays, unexpected costs or other problems experienced in connection with dispositions or with integrating acquisitions and achieving expected savings and synergies; and Note: Please refer to the glossary of terms used in this report on pages 189 to 191.  currency ﬂ uctuations. Sappi Limited is listed on the following stock exchanges and is subject to their listing requirements:  JSE Limited, South Africa (primary listing)  New York Stock Exchange, USA (secondary listing) We undertake no obligation to publicly update or revise any of these forward-looking statements, whether to reﬂ ect new information or future events or circumstances or otherwise. This report is printed on Magno Satin: cover – 250g/m2, pages 1 to 64 – 150g/m2 and Triple Green Silk: pages 65 to 200 – 115g/m2 Sappi is a leading producer of coated fi ne paper used in the printing of high end printed communications. Cover picture: Wood chips are a renewablle resource from certiﬁ ed forests used at Sappi Saiccor Mill www.sappi.com This report has been compiled and produced by Sappi Corporate Affairs® 2010 Sappi House • 48 Ameshoff Street • 2001 Braamfontein • Johannesburg • South Africa www.sappi.com Inspired by life “Look deep into nature, and then you will understand everything better” – Albert Einstein This inspiration and the insights we gain informs our technical excellence, our innovations, our relationships and the use of our resources. It is the spark that ignites the passion in our people and makes the end solutions relevant and successful. annual report 2010 a n n u a l r e p o r t 2 0 1 0

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